Applying the Central Clearing Mandate: Different Options for Different Markets
IMF Working Papers, January 28, 2022
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Bibliographic details
- Authors: John Kiff, Alessandro Gullo, Cory Hillier, Panagiotis Papapanagiotou
- Published: January 28, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616359232.001
Overview
- In 2009, G-20 leaders called for all standardized over-the-counter (OTC) derivatives to be cleared through central counterparties (CCPs).
- As of the paper's summary, 18 of the 24 Financial Stability Board (FSB) member jurisdictions have mandatory central clearing frameworks in place, covering at least 90 percent of all standardized OTC derivatives in their jurisdictions.
- Several countries continue to face policy questions about how to implement the clearing mandate, particularly given the international dimension of OTC derivatives contracts.
- The paper examines the policy options available to countries that have yet to fully conform to the clearing mandate, focusing on either the setup of local CCPs or the use of foreign CCPs, and elaborates on their feasibility, risks and benefits from economic, legal and tax viewpoints.
Key findings and statistics
- Numeric milestones:
- "2009" — G-20 leaders' call for central clearing of standardized OTC derivatives.
- "18 of the 24 Financial Stability Board (FSB) member jurisdictions" — jurisdictions with mandatory central clearing frameworks.
- "at least 90 percent" — coverage of standardized OTC derivatives in those jurisdictions.
- The analysis explicitly centers on tradeoffs between:
- Establishing local CCPs.
- Using foreign CCPs.
- The assessment covers three main dimensions: economic, legal, and tax.
Policy options analyzed
- Option A — Establish a local CCP:
- Feasibility considerations for domestic market depth and infrastructure.
- Economic benefits and risks tied to concentrating clearing in domestic legal and supervisory frameworks.
- Legal and tax implications of local clearing arrangements.
- Option B — Use foreign CCPs:
- Feasibility considerations for cross-border access and interoperability.
- Economic benefits and risks related to reliance on foreign legal and supervisory regimes.
- Legal and tax implications of outsourcing clearing to foreign entities.
Economic, legal, and tax considerations (themes)
- Economic:
- Market structure and size influence whether a local CCP is viable.
- Tradeoffs between local resilience and efficiencies from global liquidity.
- Legal:
- Cross-border contracts raise questions about applicable law, enforceability, and crisis management coordination.
- Tax:
- Withholding tax and other tax-policy interactions can materially affect the net cost of clearing and market behavior.
- The paper elaborates on feasibility, risks, and benefits in each of these dimensions for both local and foreign CCP approaches.
Implications and policy recommendations (high-level)
- Jurisdictions that have not yet fully implemented the clearing mandate should:
- Weigh the tradeoffs between establishing local CCP infrastructure and accessing foreign CCP services across economic, legal, and tax dimensions.
- Consider domestic market size, legal enforceability of cross-border contracts, and tax-treatment implications when designing mandatory clearing frameworks.
- Design policy frameworks that manage the international dimension of OTC derivatives while meeting the clearing mandate's objectives.
Applying the Central Clearing Mandate: Different Options for Different Markets — John Kiff, Alessandro Gullo, Cory Hillier, Panagiotis Papapanagiotou; January 28, 2022.
Content in this bundle
- Working Paper