A critical analysis of the new EU regulatory regime for the OTC derivatives market and its implications on financial markets

Abstract

While OTC derivatives were not the sole origin of the global financial crisis, it has been argued that the lack of a regulatory regime of this market provided channels for systemic risk to propagate. It is therefore by no coincidence that the G-20 leaders decided to regulate the OTC derivatives markets to efficiently manage the systemic risk posed by this market. This dissertation aims to provide an insight of the new EU regulatory regime for the OTC derivatives market principally emanating from the European Market Infrastructure Regulation (‘EMIR’). Through the implementation of EMIR, European regulators are seeking to, amongst others, improve regulatory transparency of the formerly opaque OTC derivatives market and reduce systemic risk through central clearing for ‘standardised’ OTC derivative products. Whilst transparency in the OTC derivatives market has significantly improved through EMIR’s reporting obligation, major challenges remain. Moreover, although the margin requirements in respect of OTC derivatives not cleared by a CCP are not yet in force, there are a number of concerns relating, in particular, to liquidity issues that the posting of margin might entail. This dissertation also analysed the central clearing obligation, which is expected to come into force in 2016, but which obligation is already raising a number of questions as to whether the transfer of a large concentration of derivatives’ exposures to CCPs will actually eliminate or rather create a new type of systemic risk.