What If a Clearing House Failed?
By Hester Plumridge
Published December 2 2011 Wall Street Journal
Clearing houses may be the next too-big-to-fail institutions. These circuit-breakers of the financial system weathered the collapse of MF Global and Lehman Brothers, and clear trillions of dollars of transactions every day. But they are about to take on a lot more risk, and there is no plan in place to deal with a big player failing. That should set alarm bells ringing. Clearing houses play a crucial role in markets from equities to derivatives, stepping in between two parties in a trade to guarantee payment if either side reneges. To protect themselves against the risk of default, they require their members—banks and brokers—to be well-capitalized, to deposit collateral, and to pay into a default fund. LCH Clearnet, Europe's largest independent clearer, notes its fund has never been tapped. U.S. clearer FICC estimates its government debt arm could withstand the failure of its largest member.
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