The Clearinghouse Cure

By Todd Zywicki on March 17, 2011

In response to the financial crisis of 2007-2009 and the various proposals to regulate problematic markets, Dr. Craig Pirrong, Director at Global Economics Group, strongly cautions against treating all derivatives alike when it comes to their regulation. In The Clearinghouse Cure (Regulation magazine, Winter 2008-2009), Dr. Pirrong writes that a clearinghouse will not automatically neutralize systemic risk in the market for credit default swaps, because a CDS clearing house may worsen the efficiency of default risk while not affecting the externality that leads market participants to ignore the effects of their risk-taking activities on the safety and stability of the financial system. Dr. Pirrong concludes that a regulatory fix now may require another fix in the future. The Clearinghouse Cure