Central counterparties for OTC derivatives: Neither panacea nor placebo

Abstract

Regulators around the world are currently drawing their conclusions from the recent financial crisis. One area where new regulation is highly likely to occur is the market for OTC derivatives. In this context, a great deal of importance is given to the establishment of central counterparties (CCPs) for OTC derivatives, in particular for credit default swaps. This paper discusses some of the key design issues that need to be in place in order for CCPs for OTC derivatives to reduce systemic risk. It is also argued that the establishment od such CCPs should be accompanied by a wide range of additional changes and measures in the trade and post-trade environment of OTC derivatives.