by Pater Tenenbrarum, Acting-Man.com:
How Safe Are Clearing Houses?
One of the aims of the Dodd-Frank Act was to lower the risks posed by derivatives by moving trading from over the counter markets to clearing houses. However, it is simply not possible to ‘lower systemic risk’ in this way. One can only shift the risks from A to B, but not lower them. Since banks tend to be well informed about their counterparties and have developed a sophisticated system ensuring the posting of margin in a timely manner, it can be argued that the OTC system was actually safer than what has in the meantime developed. In fact, banks are making precisely this argument as the FT reveals in another article on new risks faced by the financial system:
“Fast-expanding clearing houses on both sides of the Atlantic are posing a growing risk to the stability of the financial system, some of the world’s top bankers have warned.
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