If the authorities compel clearing of OTC derivatives, they will be making a big mistake, argues Ruben Lee. The policy is likely to create problems, rather than solve them.
If you are a politician or a regulator, you had better be responding to the credit crisis right now. Do something – do anything.
Amongst the myriad proposals out there, the one that has gained near global consensus is mandatory, or at least strongly incentivised, clearing of OTC derivatives through a central counterparty (CCP) or clearing house.
Such universal certainty is reassuring to us contrarians. It is always a good signal that the policy is wrong, and this instance is no exception.
The logic of the proposed policy goes as follows. There were serious problems both in bilateral monitoring of counterparty creditworthiness in some OTC derivatives markets during the crisis, and in ensuring that counterparties lived up to their...