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May 9, 2013

Harvard Law School | The Dodd-Frank Act’s Maginot Line: Clearinghouse Construction

Earlier today, Mark J Roe published an abstract to his paper on clearing houses on the Harvard Law Blog (a link to which is here. The full paper can be downloaded here).

It is an eloquent, thought-provoking paper which reviews the financial crisis, describes the functionality of a CCP, and introduces some well-known criticisms of central clearing (e.g. that they're the new "too big to fail", that they'll result in collateral scarcity during times of crisis, that they merely transfer risk rather than eliminating it, etc.).

In addition to pointing out the shortcomings of CCPs, Roe suggests risk-mitigating alternatives to CCPs, such as expanded ISDA set-off structures and private institutions for netting.

One significant concern I have with the paper is that it doesn't give the CCPs due credit for the orderly post-default settlement of Lehman's $9trn IRS portfolio in 2008 (see here). Instead, the footnote on p.33 brushes off this achievement by saying  "…the obligations cleared were the easy ones, which may well also have settled out bilaterally quickly". They may have settled quickly had they been bilateral, but how could we ever determine this?

My criticism aside, I do recommend reading the article, if you have the spare time to read through 45 pages. It would be interesting to hear people's feedback on the paper in the "comments".

Ben L.


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