Swaps 'Armageddon' Lingers as New Rules Concentrate Risk

Barney Rubble v Barney Frank

On a good day, 27-year-old Bobby Timberlake at CME Group in Chicago rounds up $2.5bn from the world’s biggest traders and banks such as JPMorgan Chase to cover their losses in the $639 trillion derivatives markets.

Bloomberg reports that what happens on a bad day will test new rules in the Dodd- Frank Act designed to prevent a repeat of 2008’s credit crisis.

Starting in March, as much as 79% of derivatives trades known as swaps must be backed by collateral and go through clearinghouses such as CME Group. Traders may have to post $927bn with Timberlake and his peers at LCH.Clearnet Group Ltd. and IntercontinentalExchange Inc. (ICE), whose role as middlemen is to ensure participants get paid.

This arrangement can withstand almost any shock, including defaults by four of the biggest lenders, according to the clearinghouses. Some bankers and researchers aren’t convinced. They warn unprecedented amounts of risk will be concentrated in a handful of clearinghouses - some newly eligible for emergency Federal Reserve loans. If they fail, taxpayers who financed $1.2 trillion of bailouts last time could be on the hook again.

'Clearinghouses have been oversold as a way of preventing Armageddon', said Craig Pirrong, a former futures trader and now a finance professor at the University of Houston who has studied the system. While a clearinghouse is 'highly unlikely' to collapse, 'I just don’t think that realistically you can exclude the possibility that taxpayers could be at risk'.

Hit the link below to access the complete Bloomberg article:

Swaps 'Armageddon' Lingers as New Rules Concentrate Risk

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