ABSTRACT
This chapter argues that the current UK regime of Central Counterparties (CCP) is fractured, because it disregards one of the most traditional characteristics of the over-the-counter derivatives market (OTCDM)–innovation risk. It presents an overview of governance rules of European Market Infrastructure Regulation and the role that UK Senior Managers and Certification Regime could have if applied to individuals who work in CCPs. The chapter explores how the 'innovative' use of portfolio compression diminishes the effectiveness of CCPs as managers of counterparty credit risk in the OTCDM, as well as the impact this practice might have on triggering systemic risk. It explains the failure to rule innovation risk in UK regime of CCPs in the OTCDM, emphasising that safety and soundness of the OTCDM requires regulators to consider the risk that innovation. The chapter also explores how innovation in the form of creative compliance is likely to lead to some of the unintended consequences of the CCP regime.
