Banks have agreed to form a system to serve as a clearinghouse for credit-default swaps, or more precisely, 17 banks and the Fed have agreed to build a clearing house system. This is one of the great vulnerabilities in the financial system and need to be plugged now. This is where a futures exchange-type clearinghouse could be helpful with standardized margin structure. This area is also where the government needs to exert its regulatory power to push the market in this direction.
While banks are less likely to hand over this lucrative business to the Chicago Mercantile Exchange, there is an alternative, the Clearing Corp which used to clear trades for the CBOT and is owned by a set of banks. Rules could be standardized and all trades cold be matched with the clearinghouse. There will be a increase in back office efficiency and an increase in liquidity from the standardization but most important the likelihood of fails will decrease. Outstanding contracts that match could be terminated no different than futures offsets so that the logjam of paper would be reduced.
This is a good idea not only for securing the existing contracts and the viability of the market but also as an effort to better the future financial system.
While banks are less likely to hand over this lucrative business to the Chicago Mercantile Exchange, there is an alternative, the Clearing Corp which used to clear trades for the CBOT and is owned by a set of banks. Rules could be standardized and all trades cold be matched with the clearinghouse. There will be a increase in back office efficiency and an increase in liquidity from the standardization but most important the likelihood of fails will decrease. Outstanding contracts that match could be terminated no different than futures offsets so that the logjam of paper would be reduced.
This is a good idea not only for securing the existing contracts and the viability of the market but also as an effort to better the future financial system.
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