Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, March 4, 2012

Greenberger on Derivatives Clearing Market

Diversifying Clearinghouse Ownership in Order to Safeguard Free and Open Access to the Derivatives Clearing Market, by Michael Greenberger, University of Maryland Francis King Carey School of Law, was recently posted on SSRN.  Here is the abstract:

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over these markets to the disadvantage of swaps users.

This article focuses on the importance of swaps clearing to Dodd-Frank-mandated market reforms and the need for fair and open access to that clearing. Specifically, it shows that implementing objective governance standards for DCOs that include maximum capital requirements for DCO membership will enhance market stability and efficiency. To this end, the article focuses exclusively on clearing as it lies at the heart of Dodd Frank market reforms. Also, although the article discusses the SEC‘s proposed rules on DCO governance and ownership, it primarily focuses on the CFTC‘s rulemaking for DCOs since the CFTC has jurisdiction over 85% of the derivatives market.

The article is divided into four parts. First, it shows that Congress intended the CFTC to adopt rigorous rules regarding DCO governance and ownership that eliminate the conflicts of interest that have allowed SDs to stifle competition for clearing services and to charge unnecessarily high transaction fees. Second, it explains how pre-Dodd-Frank market forces have limited access to clearing. Third, it shows that the CFTC‘s final rule on participant eligibility—particularly the rule establishing a $50 million threshold for DCO membership—promises to both improve swap users‘ access to clearing and ensure greater stability within the derivatives clearing market. Finally, the article argues that the CFTC should strengthen its proposed governance standards for DCOs in order to safeguard swap users‘ access to clearing against the possibility that the CFTC‘s participant eligibility requirements fail to increase DCO membership.

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Brooks Bornsley was correct in the late 1990s that the derivatives market needs to be put on an exchange and be properly regulated. When the derivative crisis finally arrives, the insolvency of the entire banking system will be revealed in all its ugly glory. Speculation by these institutional banks will be the ruin of the entire Republic. The old laws (Glass Steagal) need to be reinstated. The rule of law as it stands today has been undermined by the criminal banking regime.

Posted by: Legal Advice | Mar 12, 2012 2:33:22 PM

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