The Unfinished Business Of Regulating Clearinghouses

83 Pages Posted: 14 Dec 2020

See all articles by Paolo Saguato

Paolo Saguato

George Mason University, Antonin Scalia Law School; Genoa Centre for Law and Finance

Date Written: January 24, 2019


Financial derivatives have been widely blamed for causing the 2008 financial crisis. These complex instruments created a deep and opaque web of bilateral links between major financial institutions that contributed to the transmission of systemic risk throughout financial markets. In order to stabilize the derivatives markets, legislators included radical provisions in the Dodd-Frank Wall Street Reform Act of 2010. As a result, traders are now required to process derivatives through clearinghouses: specialized risk managers that act as middlemen between buyers and sellers and guarantee each party’s performance.

Policymakers believed that clearinghouses would provide much-needed stability in derivatives markets by acting as designated systemic risk managers. However, this Article argues that the effect of clearinghouses on systemic risk is less clear-cut than scholars and policymakers have generally believed. While clearinghouses have removed much of the financial risk from markets, they have simultaneously concentrated it within their own walls. Yet, these walls stand on fragile foundations: the economic and governance incentives of clearinghouses and their stakeholders are misaligned, which could undermine their systemic resilience.

This Article contends that the current regulatory framework has critical, overlooked flaws that exacerbate clearinghouses’ moral hazard while creating new, risky, too-big-to-fail institutions. It urges policymakers to intervene: in order to rectify this situation, financial regulators must do more to ensure that clearinghouses are bastions of financial stability and not systemic risk amplifiers. The implementation of a multi-stakeholder board and the creation of hybrid financial instruments to complement the capital structure of clearinghouses are the first steps toward enhancing the accountability and systemic resilience of these critical market infrastructures.

Keywords: Dodd-Frank, clearinghouse, central counterparty, risk-sharing, default waterfall, CFTC, title VII, title VIII, CCP, central clearing, risk management, Federal Reserve, resolution, systemic risk, financial crisis, derivatives

JEL Classification: G20, G21, G23, G10, G18, K20, L50, G28, G32, G38, G15, K00, K12, K2, K22, K23, K20

Suggested Citation

Saguato, Paolo, The Unfinished Business Of Regulating Clearinghouses (January 24, 2019). Columbia Business Law Review, Vol. 2020, No. 2, 2020, Available at SSRN:

Paolo Saguato (Contact Author)

George Mason University, Antonin Scalia Law School ( email )

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703-993-8278 (Phone)

HOME PAGE: http://

Genoa Centre for Law and Finance ( email )

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Genoa, Genoa 16100


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