CCPs stand at the center of our financial system, because after the 2008 crisis the G-20 countries agreed that most swaps should be cleared through them. This would, in theory, reduce systemic risk by collectivizing losses among the world's largest banks. Now, for example, about 70 percent or $230 trillion in interest rate swaps are centrally cleared, as compared to only 16 percent or $54 trillion at the end of 2007.
The world's largest banks act as dealers in this market by buying and selling interest rate swaps for their clients. Their clients include banks, investment funds, and insurance companies seeking to manage the risk that interest rate fluctuations pose to their large bond and loan portfolios. Non-financial companies also regularly use these swaps to reduce funding costs and plan for future payment obligations.
Reduced competition among CCPs would increase the cost of clearing and therefore the cost of using these swaps. It would also further concentrate their risk in Europe. The only way to avoid this outcome is for the European Commission to determine that U.S. CCPs are subject to equivalent regulation as EU CCPs before the deadlines pass. This is called recognition. Unfortunately, the European Commission has refused to do so for the past four years, even though it has done so for many other countries. Why?