Dat Ain't No "Clearinghouse!"

Among the have-your-cake-and- eat-it-too suggestions following enactment of the Dodd-Frank Act is to form a new type of "clearinghouse" that allows traders to opt-out of the mutualized risk pool so that their funds at the clearinghouse cannot be touched if someone else defaults.

It is unlikely that the Commodity Futures Trading Commission would ever entertain such an idea for the existing futures clearinghouses but the concept might be applied to new ones set up to handle off-exchange swaps (Dodd-Frank allows private swapping more than you may have been led to believe).

Using the catchy phrase "ring-fencing," advocates infer that they might not clear their private swaps at all if their funds might be at risk in the event of some stranger's default.

Existing clearinghouses weathered the financial crisis (2008 - ?) without any federal bail-out. Risk mutualization is why.

Should this idea gain traction I have two suggestions. First, don't let them be called "clearinghouses." That would be like permitting MacDonalds outlets to call themselves "hospitals." Second, adopt a more accurate name. The term "Titanic" comes to mind.

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