Does EU Regulation Adequately Address the Tension between CCPs Shareholders’ and Clearing Members’ Incentives?

Abstract

Abstract 964The current EU regulatory regime of Central Counterparties (CCPs) falls short of addressing adequately the potential misalignment of incentives of CCPs’ shareholders on the one hand and clearing members on the other hand.Thus, according to the European Market Infrastructure Regulation (EMIR), while clearing members contribute substantially to the default waterfall of a CCP, they do not enjoy substantial governance rights: they merely participate in the risk committee of the CCP, whose role is only advisory.By contrast, although shareholders are vested with substantial governance rights, such as the right to appoint the members of the board which sets the CCP’s risk profile, they do not bear final losses first, as in ordinary companies: the shareholders’ contribution to a CCP’s default waterfall is limited and, in case the CCP enters resolution, they only bear losses, in principle, after the clearing members.It is however clear that when the owners of a firm are not the ones bearing the risks first, the firm may be inclined to excessive risk-taking. The objective of this article is therefore to discuss a number of ways to improve the corporate governance of CCPs, in particular the incentive setting for shareholders.965