Making it clear
Q What are clearing houses?
A Clearing houses sit in between the two parties in millions of transactions in securities – shares, derivatives and so on. They give a legal guarantee that a trade will go through in the event of one party going bankrupt halfway through it, in return for which they demand collateral and fees.
Q Why do regulators like them?
A Clearing houses performed well in the 2008 crisis and were one part of the system that did not freeze up and cause panic. They also provide regulators with data as to who is exposed to whom, which was severely lacking in 2008. As a result, regulators are now forcing banks to put many trades, such as those in complex derivatives, through clearing houses that before happened over the counter (OTC) between client and bank.
Q What’s the problem?
A Increasing reliance on clearing houses concentrates more risk in them and makes it more catastrophic if they fail.