The central clearing of Over the Counter Derivatives and the potential risks: The need for international coordination for supervising and regulating clearing houses

Using as an example the regulatory initiatives in the United States (US) and the European Union (EU) this paper focuses on the risks that the international initiatives, in their current form, fail to combat or the new risks that arise. This paper first gives a general understanding of the types of OTC derivatives, explains their pre-crisis regulatory background and the role they played to the crisis and the hidden risks that the crisis revealed. Second, it explains the regulatory framework of clearing houses as central counterparties for OTC derivatives transactions and sets, in a comparative way, the relevant national regulations in the EU and the US. Third it examines the risks that the international initiative entails per se but also those deriving from the inconsistencies among the nationally adopted regulations. Finally, it proposes as solutions to these risks the international coordination of the national competent authorities, both in their capacity as regulators and as supervisors, and highlights the additional need for the coordination of substantive national laws.