Law and Economics of Central Counterparties (CCP) – Selected Issues of Regulation and Competition Concerning Financial Market Infrastructure

The obligatory clearing of certain contracts through CCPs, that is imposed by Regulation (EU) no. 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (called “EMIR”, i.e. European Market Infrastructure Regulation), is justified by the need to increase the transparency of the derivatives market, to mitigate systemic risk and to promote stability of the financial system. Central counterparties (CCPs) are clearing houses that interpose themselves between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. In this way CCPs are responsible for the clearing of transactions concluded on derivatives market, which reduces the credit risk of individual counterparties. The EU legislator creates a legal framework for the functioning of CCPs that become new systemically important institutions. In addition, EMIR leads to the creation of a kind of monopoly as CCPs’ services become compulsory for entities involved in trading on financial instruments that will be subject to central clearing. For these reasons, EMIR represents new and difficult challenges for effective oversight and supervision of financial markets. The tendency to maintain a market structure where operate only a relatively limited number of CCPs is likely to be perpetuated due to the predominance of entities with established market position, as well as the presence of high sunk costs associated with the rigorous regulatory requirements that determine the possibility of entering the market. The regulation of financial market infrastructure has to take into consideration and to integrate two perspectives: micro (transaction costs) and macro (systemic risk).