Following the lead of the US Dodd Frank Act, global derivatives regulators have fashioned rules that require central clearing of derivatives and thereby shift risk from financial institutions to the central counterparties that clear them. We're pleased that regulators are openly acknowledging the massive potential problem this creates, and hope the discussion results in a reasonable solution to this massive global financial issue.
Global regulators have yet to agree on who would pay the trillions of dollars that would be needed to bail out any failed clearing house for derivatives. While policymakers don't want taxpayers to rescue clearers, central banks like the Bank of England and European Central Bank have said they would offer backstops to clearing houses in emergencies. "All of this is very much under discussion not only in Brussels but in New York, Washington and in Asia," Pearson. He said clarity would be needed on whether central banks will stand behind a clearing house and under what circumstances. A blanket central bank guarantee could create unintended consequences, such as a clearing house then taking less care about mitigating risks, he added. "It's not necessary, it's not desirable but that discussion should be had."