Clearing corporations in OTC derivatives

The Economist makes the same point I made earlier this month in the Economic Times about the risk of introducing clearing corporations clearing and guaranteeing OTC derivatives and exotics. In my opinion and also the magazine, this has the potential of a big blowup which would bring down the whole system.

And while regulators fret that some banks are “too big to fail”, they may be creating another set of institutions of equal systemic importance. “With their myriad clients the big trading banks in effect function as CCPs already,” says Darrell Duffie of the Stanford Graduate School of Business. “Why double their number?”

I'm happy that, though we are a minute minority, there are views which go against the common wisdom of a big guarantor of exotic products. Luckily for the system, the OTC market place is too big to fit into the exchange and clearing market place (at 10 times the GDP of the world). So we will hopefully not do too much damage in the short term.