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Clearing Houses Risks

Regulations affect any type of industry for that matter. There are always two groups of people, those believing having less financial regulation is better and those who consider that many regulations are better in order to protect the public. In the same way, clearing houses are meant to come up with solutions to problems in derivatives markets, but they can also lead to creating some problems as well.

The source of anxiety is provided by clearing houses, which is an entire financial installation that stands between the buyers and sellers in transactions. In fact, clearing houses provide services for financial derivatives and transactions. The risk of failures is concentrated on clearing houses, but it is also able to isolate the failure effects on the market participants. In order to manage it, proper management is required and well capitalization, to assure the survival in case of an adverse event, such as a market crash for example.

Banks conduct trades between themselves at the moment, dealing with the complexity of scale that is rather difficult to track. The financial crisis is still ranging and the government, the banks and hedge funds are faced with the unstable levels of debt. Many industry insiders are wondering if clearing houses are more secure. But what happens if they fail? Many say it would be mayhem. They protect the companies from shortage, as they hold the guarantees in the name of their members, numerous of which can be used to reimburse individual firms, in the case of a member turns out insolvent.

But clearing was not always into the spotlight, as it was overlooked when it comes to trading of exchanges. It all happened in 2008, when Lehman Brothers threw it to our attention. Markets that used clearing houses were sorted out in just a couple of days, whereas non-cleared markets took even years. Based on such an experience, regulators started using clearing houses to diminish the defaults by large trading firms. This still brings a lot of questions in everyone’s minds and perhaps the most common one is: who bears the responsibility in case the house gets in trouble?

Due to the economic crisis, which had a lot to do with the lack of an effective financial regulation, the financial system had to be reconsidered. Financial services carry a great deal of risks that also wind with the risks in financial organizations as well. Just one financial service organization needs to meet collapse in order to cause possible collapse to others, which can bring the global economies down. It is rather difficult to put the major regulatory constraints in place.

A new financial regulation is needed to strength the financial system. Potential regulations should focus on certain aspects of the matter, such as “what” businesses are allowed to do and not “how” businesses are conducted. This would eventually lead to a more efficient and effective environment. Any possible change can affect the economical status and there are many contradictory opinions in the field of financial regulation.

In order for a new financial regulation to be installed, detailed documentation and procedures are needed and testing to make sure they comply with the procedures. There are certain benefits of clearing houses, such as the improvement of transparency.