Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the-Counter Innovations

42 Pages Posted: 2 Aug 1999

See all articles by Randall Kroszner

Randall Kroszner

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: March 1999

Abstract

This paper explores how organization and contract design has evolved to address regulatory challenges in risk management. In the early part of the century, futures exchanges responded to credit risks by developing clearing houses that act as guarantors. The liability structure of the clearing house involves mutualization of risks through "partial permanent" integration of the exchange members. Bank clearing houses historically involved "contingent" integration and risk mutualization during panics. Recent organizational innovations have allowed the risk-control benefits of the clearing house to be replicated in the decentralized over-the-counter derivatives markets. Credit rating agencies and advances in risk modeling are key to permitting the recent "dis-integration," which has implications for the scope of public versus private regulation in banking and financial markets.

JEL Classification: L22, G28, K22, N20

Suggested Citation

Kroszner, Randall, Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the-Counter Innovations (March 1999). Available at SSRN: https://ssrn.com/abstract=170350 or http://dx.doi.org/10.2139/ssrn.170350

Randall Kroszner (Contact Author)

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