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Highly-respected media have given prominent lament about how central clearing of derivatives transactions could make those entities "too big to fail" and someday prompt a rescue by the U.S. Government. Really?

Let's first consult history. During the recent financial crisis while the Troubled Asset Relief Program (TARP) was shoveling boatloads of billions into the financial community, the regulated clearinghouse needed exactly —$0— TARP dollars. An accident? Luck?  Divine Intervention?

More history.  Many decades ago we Humans noticed that we share many common dangers. Our lives, our health, our homes etc. were at risk. But, instead of saying "every man for himself," we pooled the risk at modest cost to each of us, and the insurance industry was born.

Clearing does the same thing. All traders contribute to a clearing pool just in case one or more of them defaults. Once a defaulter's deposits are exhausted, the rest cover the remaining shortfall, which has always been sufficient without ruining them.

The liquidation of Lehman Bros. losses on cleared derivatives trades went smoothly (dealing with the remaining mess continues).

 The cleared derivatives market demands collateral from its users and monitors exposures like a high school hall monitor polices smoking. Falling behind? Pay up NOW or get out NOW.

How can this possibly be a threat to the economy? Are we better off with the old system where staying current on one's obligation was replaced with a handshake, or a letter of credit from an equally troubled bank, or a keep-well from a parent organization that might perish along with its sub, or a "It's OK, I met the counterparty's CEO at Davos and he seemed like a nice guy," or "Don't ask Bernie for collateral, the Madoffs have been around for decades"?

 Clearing is a light-years improvement over the slap-dash prior regime. If pooling risk for everyone's protection is bad, I have a number of insurance policies I need to cancel.

Philip McBride Johnson is a former CFTC chairman and long-time observer of the industry. You can reach him at

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