“Incomplete demutualization†and financial market infrastructure: central counterparty ownership and governance after the crisis of 2008–9

Robert T. Cox and Robert S. Steigerwald

Journal of Financial Market Infrastructures

Abstract: ABSTRACT In this paper, we examine a key conflict between the owners and clearing members;of "demutualized" central counterparties (CCPs), in which ownership is separated;from clearing participation. Despite the advent of demutualization in the early 1990s,;clearing members remain the ultimate underwriters of CCP default risk, a situation;we describe as "incomplete demutualization". Fundamental changes in regulatory and;financial stability policy in thewake of the crisis of 2008-9 have led clearing members;to reassess their role in CCP default management. This, in turn, has led to skirmishes;between some CCPs and clearing members over a variety of risk-related issues. Policy;responses to this conflict should focus primarily on the incentives of both CCPs and;clearing members to participate collaboratively in CCP default management, and;on the overall resilience of central clearing arrangements. Continued conflict over;governance may make it impossible for a CCP in crisis to recover and may also;hinder resolution efforts.

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