| Abstract: | The Dodd-Frank Act mandates the widespread adoption of centralized clearing of OTC derivatives and also includes measures designed to move more derivatives trading onto exchanges. But, as the author points out, such a clearing mandate appears to be based on the premise that the recent experience in OTC derivatives represents a major market failure and that participants in what is now the world's largest financial market have been systematically choosing the wrong institutions for risk management and trading. In this article, the author begins by explaining why all derivatives are not cleared or exchange-traded, and why the attempt to mandate such practices (as opposed to encouraging voluntary adoption through differential capital requirements) could have serious unwanted consequences. Among such consequences is a possible increase in the very systemic risk that such mandates are supposed to prevent. |
