1/15/2010

Regulators and central bankers have been encouraging over-the-counter derivatives dealers to route trades through central clearinghouses as a way to reduce risk. However, clearinghouses also pose a risk because they must be strong enough to survive defaults by any of their members. "If a [central clearing counterparty] is successful in clearing a large quantity of derivatives trades, the CCP is itself a systemically important financial institution. The failure of a CCP could suddenly expose many major market participants to losses," the Federal Reserve Bank of New York wrote in a policy paper.

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