Central clearing for credit default swaps: A legal analysis of the new central clearing regulations in Europe and the US

Purpose – The purpose of this paper is to answer a specific research question: How have EU and US regulators translated the idea of central clearing into law? Design/methodology/approach – A meticulous legal research is carried out. First, the pre-crisis regulatory regime for credit default swap (CDS) is reviewed, from a securities law angle as well as from a comparative Euro-American perspective. Next, the regulatory processes leading to the adoption of the central clearing regulations are discussed. Thereafter, a material comparative analysis is made of the provisions related to central clearing in the EU and US regulatory initiatives. Finally, the paper is concluded with an evaluation of both legislations in the light of all previous analyses. Findings – The research first shows that central clearing regulations rely on a series of presumptions, both concerning the gravity of counterparty risk threats and the necessity of central clearing. Additionally, the EU and US clearing regulations are similar with regard to the broad innovations they introduce, i.e. the mandatory central clearing of a variety of over-the-counter derivatives and counterparty risk management requirements for central clearing institutions and for non-cleared swaps. However, the specific content of the provisions often differs. Furthermore, both legislations are limited to enouncing broad principles. This is also the case for the crucial provisions related to counterparty risk management. Therefore, these provisions in se do not guarantee the proper regulation of counterparty risk management practices. Consequently, much is to be expected from the implementing measures adopted by regulatory institutions. Originality/value – The paper provides an overview of those provisions in the European and US regulations that specifically concern central clearing for CDS. It is one of the first papers which does this in a very well-structured and clearly written manner. Also it is one of the first to provide a clear comparison between the provisions in the EU and the US regulations.