Streetwise Professor

May 17, 2011

Who Knew?

Filed under: Clearing,Derivatives,Economics,Exchanges,Financial crisis,Politics,Regulation — The Professor @ 3:23 pm

Derivatives Reform Proving Difficult.

Regulatory arbitrage raises its ugly head.

‘ET’ [Extraterritoriality] stokes fears about sweeping swap rules.

Clearinghouses Would Not Have Prevented the Financial Crisis.

I’m Shocked! Shocked! to hear that reforming complex markets based on complex contracts among numerous complex financial firms that span myriad jurisdictions around the globe is actually like complicated or something.  I thought Chrissy and Barney and Timmy!  and various Euro-types could rearrange these markets at a whim and make everything all better.

Not really.  I’ve seen a train-wreck from the get go.

Take clearing in particular.  If you’ve spent any time on this at all, you know that the details are incredibly complex.  The economics are challenging, the legal aspects daunting.  My white paper* goes into this in some detail.  This paper does a nice job at explaining some of the legal issues–but still only scratches the surface. If you think you can rearrange something so intricate and have it all work out just swell, you’re in for a rude surprise.  The problem is that you don’t learn what the problems are until they appear, completely unanticipated.

Mark my words.  Re-engineering these markets will lay the foundation for a future crisis.  If only people had heeded Hayek’s aphorism: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

* The white paper is done, and approved.  It should be released formally this week–maybe tomorrow.  Apparently the PR folks at the organization that commissioned the study wanted a few days with it to figure out how to distribute and market it optimally.

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  1. […] Ex Macchiato The Economics of Central Clearing: Theory and Practice – Craig Pirrong / Isda Who knew? – Streetwise […]

    Pingback by FT Alphaville » What do you mean, CCPs might be thinly capitalised? — May 24, 2011 @ 10:26 am

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