31. The Inefficiency of Clearing Mandates
- Author:
- Craig Pirrong
- Publication Date:
- 07-2010
- Content Type:
- Working Paper
- Institution:
- The Cato Institute
- Abstract:
- In the aftermath of the financial crisis, attention has turned to reducing systemic risk in the derivatives markets. Much of this attention has focused on counterparty risk in the over-the counter market, where trades are bilaterally executed between dealers and derivative purchasers. One proposal for addressing such counterparty risk is to mandate the trading of derivatives over a centralized clearinghouse. This paper lays out the advantages and risks to a mandated clearing requirement, showing how, in some instances, such a mandate can actually increase systemic risk and result in more financial bailouts.
- Topic:
- Economics, International Trade and Finance, Markets, and Financial Crisis