The Clearinghouse Cure
8 Pages Posted: 19 Feb 2009
Date Written: February, 18 2009
The current financial crisis was brought on in part by the collapse of many housing-related credit default swap (CDS) contracts. As a result, regulators have seized on the idea of requiring a clearinghouse for these contracts as a way to make the market more secure. This article argues that the allure of a clearinghouse is largely superficial. Credit default swaps and other relatively exotic instruments traded in the over-the-counter market are almost certainly far more costly to clear than standardized futures and options contracts, and a clearinghouse would be the victim of information asymmetries. Moreover, a clearinghouse may worsen the risk of contagion, as all members share the cost of contract defaults.
Keywords: finance, regulation, subprime mortgage, financial crisis, credit default swaps, CDS, clearinghouse, systemic risk, capital markets, market reform, risk-sharing, derivative, default risk, bilateral market
JEL Classification: N2, E44, F3, F30, G00, G1, G12, G13, G14, G15, G18, G2, G20, G21, G22, G24, G28, 016, P43, R31
Suggested Citation: Suggested Citation