An important piece in the Financial Times by Manmohan Singh, a senior
economist at the International Monetary Fund, describes persuasively how
one of the central vehicles for reducing derivatives risk, that of
having a central counterparty (CCP) and requiring dealers to trade with
it rather than have a web of bi-lateral exposures, or rely on banks to
act as clearers (making them too big to fail) has gone pear shaped.
While the immediate reason for this outcome is the unwillingness of
national banking regulators to cede powers to an international
clearinghouse, Singh fingers an equally important cause: the reluctance
to recognize that the underlying problem was and remains
undercollateralized derivatives positions.
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