Reforming Over-the-Counter Markets: The role of central counterparties

The document examines the transition of over-the-counter (OTC) derivatives markets toward central clearing via central counterparties (CCPs) following the 2007–2008 financial crisis. While CCPs can enhance stability by reducing counterparty credit risk and price volatility, the author argues they may introduce new systemic risks, such as destabilizing margin calls and the potential for CCP insolvency. The paper concludes that current regulatory efforts, including the Dodd-Frank Act and EU regulations, are reallocating rather than reducing risk, and warns that a loophole for 'individually negotiated' contracts could lead to further deregulation.

• The global OTC derivatives market experienced massive growth prior to the 2007–2008 crisis, expanding from US$72 trillion in 1998 to US$684 trillion by June 2008, far outpacing the growth of world GDP.
• Central counterparties (CCPs) can improve financial stability by reducing counterparty credit risk, lowering price volatility, and mitigating the procyclicality of the financial system through position netting and more efficient allocation of default losses.
• CCPs may introduce new systemic risks, including the potential for destabilizing price movements caused by sudden increases in margin requirements and the risk of systemic failure if a CCP itself becomes insolvent.
• Current regulatory frameworks, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US and the European Market Infrastructure Regulation in the EU, are shifting risk rather than eliminating it.
• A significant regulatory loophole exists because only standardized derivatives are required to be traded on exchanges; customized, individually negotiated contracts are only reported to repositories, which may lead to a return to the deregulation that preceded previous financial disasters.
• The author argues that central banks may need to provide liquidity support to CCPs and their members during periods of stress, similar to their role as lenders of last resort for banks, to prevent CCP defaults.

APA

Perera, O. (2012). Reforming Over-the-Counter Markets: The role of central counterparties. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/reforming_over_counter_markets.pdf

Chicago

Perera, Oshani. Reforming Over-the-Counter Markets: The role of central counterparties. International Institute for Sustainable Development, 2012. https://www.iisd.org/system/files/publications/reforming_over_counter_markets.pdf.

Wikipedia

{{cite report |last1=Perera |first1=Oshani |title=Reforming Over-the-Counter Markets: The role of central counterparties |publisher=International Institute for Sustainable Development |date=June 2012 |url=https://www.iisd.org/system/files/publications/reforming_over_counter_markets.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{perera2012reforming, author = {Perera, Oshani}, title = {{Reforming Over-the-Counter Markets: The role of central counterparties}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = jun, url = {https://www.iisd.org/system/files/publications/reforming_over_counter_markets.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }