Does Clearing Increase or Decrease Systemic Risk? | A Debate between Pirrong and McNamara
The debate on the outcome of Dodd Frank continues
A paper entitled "Financial Markets Uncertainty and the Rawlsian Argument for Central Counterparty Clearing of OTC Derivatives" by Steven R. McNamara of The American University of Beirut, tackles the outcomes of Dodd Frank and Central Counterparties. The paper was published in May and came to the attention of Craig Pirrong, Professor of Finance and Energy Markets, Director of the Global Energy Management Institute at the Bauer College of Business, University of Houston. Craig who is well known as a speaker and writing on Central Clearing responded via his blog to the debate on systemic risk.
My personal opinion is that the centralisation of large swathes of the capital markets, which are then driven by Risk models which are tuned to react to stressed market conditions, and the concentation risk from an operational point of view, may mean the structure of the market is more fragile in a crisis than before, due to highly increased interconnectivity. Don't take my word for it, you can also read what the Bank of England has to say too in their paper on An investigation into the procyclicality of risk-based initial margin models.
Where do you stand on this debate? Are we safer due to Dodd Frank and EMIR? Or does this introduce new and unknown risks? Let us know in the comments.