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Evaluation of Extraterritorial Regulation of Central Counterparties and Euro-denominated Clearing

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Title: Evaluation of Extraterritorial Regulation of Central Counterparties and Euro-denominated Clearing
Author(s): Olkkonen, Valter
Contributor: University of Helsinki, Faculty of Law
Discipline: Property law
Language: English
Acceptance year: 2020
Central counterparties (CCPs) interpose themselves between the counterparties to contracts traded on financial markets, becoming the buyer to every seller and the seller to every buyer. Over the past two decades, CCPs have grown into some of the world’s most interconnected financial market infrastructures clearing financial instruments worth trillions of dollars a day. A possible default of a CCP has been described as an extremely high-impact event and notable academics have considered that a default of a CCP would require a large-scale tax payer bail-out. CCP-related financial stability concerns have grown especially in the European Union (EU) as the United Kingdom (UK) exited the EU on 31 January 2020 (Brexit). Many of the world’s leading CCPs are located in the City of London and Brexit has meant that these CCPs will be no longer authorised and supervised pursuant to the European Market Infrastructure Regulation (EU) No 648/2012 (EMIR). They are moving out of the EU’s jurisdiction and becoming “third country CCPs” from the perspective of the EU regulation. The EU confronts these growing financial stability concerns by revising EMIR with European Market Infrastructure Regulation (EU) 2019/2099 (EMIR 2.2). EMIR 2.2 has entered into force on 1 January 2020 and it introduces an unconventional approach to regulate third country CCPs. This approach includes a requirement for third country CCPs to accept direct regulation and supervision of the EU authorities despite the CCPs being located outside the EU’s jurisdiction. In addition, the regime enables the controversial “location policy”, a mechanism to compel third country CCPs to relocate into the EU. This research examines the tensions in extraterritorial regulation of systemically important CCPs and how EMIR 2.2 succeeds in its objective of reinforcing the overall stability of the Union financial system in relation to third country CCPs. The first part examines extraterritorial regulation and supervision of systemically important CCPs through the financial trilemma, a theory developed in economics and international governance, to discover the underlying tensions. The aim is to arrive at a framework that enables meaningful evaluation of EMIR 2.2. The second part evaluates whether EMIR 2.2 is capable to achieve its objective.

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