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The Problematic Case of Clearinghouses in Complex Markets

dc.contributor.authorYadav, Yesha
dc.date.accessioned2017-04-25T21:45:46Z
dc.date.available2017-04-25T21:45:46Z
dc.date.issued2013
dc.identifier.citation101 Geo. L.J. 387 (2013)en_US
dc.identifier.urihttp://hdl.handle.net/1803/8388
dc.descriptionarticle published in law journalen_US
dc.description.abstractThis Article challenges the academic and policy consensus that clearinghouses adequately mitigate the risks of trading credit derivatives. The Article advances two arguments. First, scholars have devoted little attention to the risks posed by underlying assets (e.g. a mortgage loan) that the credit derivative references and the impact that these have on the clearinghouse. Credit derivatives enable the economic risk of debt to be separated from the legal rights attaching to that debt. This separation impacts the clearinghouse profoundly. As a contract party to each trade it processes, the clearinghouse can be saddled with economic risk of underlying debt without the legal rights necessary to mitigate its exposure. If a clearinghouse cannot manage its risks, the consequences are invariably systemic and enormously costly to the taxpayer. Second, the Article shows that clearinghouse members are subject to complex incentives that: (i) actually encourage risk-taking by subsidizing its cost; (ii) allow parties to shift the private costs of monitoring to the clearinghouse and themselves under-invest in due diligence; and (iii) create undue reliance on information that is impressed by the strategic motives of parties providing it. This Article, finally, proposes a new paradigm for the clearinghouse. This model seeks to repair the consequences of the separation between economic risks and legal rights enabled by the credit derivative – as well as control the perverse incentives affecting clearinghouse members. With the clearinghouse having better powers to police its exposures, the Article proposes that reform can make the clearinghouse a more robust institution and control lax underwriting standards more broadly.en_US
dc.format.extent1 PDF (60 pages)en_US
dc.format.mimetypeapplication/pdf
dc.language.isoen_USen_US
dc.publisherGeorgetown Law Journalen_US
dc.subject.lcshClearinghouses (Banking) -- Law and legislation -- United Statesen_US
dc.subject.lcshDerivative securities -- Law and legislation -- United Statesen_US
dc.titleThe Problematic Case of Clearinghouses in Complex Marketsen_US
dc.typeArticleen_US
dc.identifier.ssrn-urihttp://ssrn.com/abstract=2006452


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