Sunday, December 9, 2012
The Speed and Certainty Benefits of a Clearinghouse in a Financial Crisis, by Richard Squire, Fordham University School of Law, was recently posted on SSRN. Here is the abstract:
The Article argues that the primary benefit of a clearinghouse in a financial crisis is to accelerate payouts to creditors when a trading firm fails. Through netting, clearinghouses provide immediate payouts to creditors who otherwise would have to wait for slower bankruptcy payouts. Quicker payouts reduce illiquidity and uncertainty, two sources of systemic risk. Clearinghouse netting can reduce illiquidity and uncertainty even if the clearinghouse is itself insolvent. Unlike benefits of clearinghouses purported by other scholars, faster payouts are not zero-sum: besides accelerating payouts to members, clearinghouses ease the administrative burden on the failed member’s bankruptcy trustee or receiver, permitting quicker payouts to non-clearinghouse creditors as well. By identifying faster payouts as the main systemic benefit of clearinghouses, this Article shows that there is a high degree of complementarity between the Dodd-Frank Act’s clearing mandate, which requires central clearing of swap contracts, and the statute’s “orderly liquidation authority” for large financial firms. The clearing mandate will reduce the need for the liquidation authority to be invoked, and when the authority is invoked the mandate will simplify the FDIC’s duties as receiver.