Goldman Sachs’ CEO Lloyd Blankfein raised the question last week — are clearing houses the new systemic risk to watch? Or, could they be the latest regulatory mess that will send investment houses fleeing to other shores?
Today in Washington, D.C. netnet.com reporter John Carney had a few minutes with the Chairman of the CFTC, Gary Gensler. He asked him if Mr. Blankfein was right — are we about to push all manner of derivatives and swaps onto exchanges and through clearing houses creating a bigger issue in times of financial Armageddon?
Carney: The clearing house would have lower risk if they collected enough collateral from the members but won’t there be pressure on them to collect less collateral? Won’t the banks always pressure them to be a little riskier than they should be?
Gensler: Exchanges lower risk, bring transparency.
Clearing houses lower risk because they force all of the parties on a daily basis to value their transactions and put up something called collateral or margin against that negative values that sometimes exist.
So that is far better than the alternative.
Do they still have risk? Yes.
Mr. Gensler went on to say that we need to …”make sure that the clearing houses have enough collateral and capital and risk protections so that no taxpayer support is behind them.”
Yes, I would hope that would be the goal. But, the big question of course, will be who determines what the instruments are worth and how much collateral will need to be posted against those positions. As some of the brightest minds in finance got caught on the wrong side of this trade in 2008, this is a topic worthy of deep discussion.
Watch the full interview below and no, Lloyd, Gary and John did not walk into a bar but here’s hoping they do.
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