Will OTC Clearing regulations remove risk or concentrate risk?

1. www.theplenumgroup.com
OTC Derivatives – Simply Concentrating Risk?
Few would dispute that the premise of OTC Derivatives Clearing is sound; eradicating
counter-party risk in a more transparent system where risk is shared by clearing houses
and where counter-parties post collateral, has to be good for everyone. Right?
However does this really reduce overall risk?
Some have argued that in reality, central clearing of OTC Derivatives will actually
concentrate risk into the handful of large clearing houses (such as ICE and CME) that are
set up to provide this facility. Whilst this suggestion seems to gloss over posting of
collateral, it does raise the questions of whether there are sufficient market forces at
work to ensure enough players enter this space?
It’s yet to be seen how many clearing houses will ultimately engage in OTC Derivative
Clearing. Arguably the more that do, the more the risk is shared, in line with the ethos of
the regulation.
However until OTC Derivatives Clearing is implemented and the dust has settled,
criticism of this legislation is unlikely to go away.
Originally published at www.theplenumgroup.com
Plenum 2013 – Financial Services Executive Search