Some clearinghouses want to “ring fence” each clearing member’s deposits so that they cannot be touched if another clearing member defaults? And we profess to be strengthening the financial system?
Even under the existing clearing system where clearing members backstop each other when all other resources have been exhausted, it happens about as often as a hurricane in Montana. (more…)
A prominent criticism of the Commodity Futures Trading Commission’s (CFTC) swaps rulemaking as commanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act is that many key definitions of terms remain blank while tangential provisions are vetted. It could be likened to setting standards for dogs when no one is quite sure what a “dog” is.
For example, what is a “swap”? The CFTC is addressing dealers in them, major participants in them, execution facilities for them etc. but has yet to put a ring fence around what are swaps. All we know is that Dodd-Frank treats them as “different” from the instruments – like futures contracts – that the CFTC has overseen for generations.
Highly-respected media have given prominent lament about how central clearing of derivatives transactions could make those entities “too big to fail” and someday prompt a rescue by the U.S. Government. Really?
Let’s first consult history. During the recent financial crisis while the Troubled Asset Relief Program (TARP) was shoveling boatloads of billions into the financial community, the regulated clearinghouse needed exactly —$0— TARP dollars. An accident? Luck? Divine Intervention?
More history. Many decades ago we Humans noticed that we share many common dangers. Our lives, our health, our homes etc. were at risk. But, instead of saying “every man for himself,” we pooled the risk at modest cost to each of us, and the insurance industry was born.
