(CME - Get Report)
Clearinghouses are often run by exchange operators like CME Group and
. Their goal is to ensure that all parties to a trade have sufficient funds to pay for it, since big institutions trade using borrowed money.
The importance of clearinghouses has increased since the 2008 crisis as regulators are requiring an increasing portion of the $700 trillion dollar swaps market to be cleared through a centralized entity such as an exchange. In theory, exchanges have clearing members such as large banks standing behind them that would contribute capital to backstop the exchange if it required new infusions of capital. However Boston College professor Kane argues in his essay that "the more important swaps trading on a particular exchange might become, the better its clearing members will see that adopting a corporate form will limit their individual and joint liability in crises and would help them if the exchange itself should ever become insolvent to whip up the financial, political and administrative fear necessary to trigger the bailout reflex."
In a speech last year, Bank of England Deputy Governor Paul Tucker described a "big gap" in the legal framework for winding down clearinghouses.
"What happens if they go bust? I can tell you the simple answer: mayhem," Tucker said.