Go read this, at Economics of Contempt. It explains very clearly the benefits and hazards of derivatives reform. Just as people have confused leverage and capital requirements, people are also confusing exchanges and mandatory clearing. I tried to explain this the other day, but EoC does a better, if much wonkier, job:
A clearing requirement is a requirement that all eligible derivatives be cleared on a central clearinghouse (also known as a central counterparty, or CCP). ... Virtually all of the harmful opacity and murkiness of the current OTC derivatives markets can be ended with just a clearing requirement — that is, a clearing requirement is a prerequisite for getting rid of the harmful opacity in OTC derivatives; an exchange-trading requirement is not.
In sum, virtually all of the systemic risk mitigation in derivatives reform — reduced counterparty risk, the huge increase in transparency, the reducted complexity, regulatory access to the necessary data, etc. — comes from the clearing requirement.
An exchange-trading requirement, on the other hand, is simply a requirement that all eligible derivatives use a particular type of trade execution venue: exchanges (also known as "boards of trade"). It is important to remember that an exchange-trading requirement has nothing to do with clearing — they are completely separate issues. People tend to think of exchanges as synonymous with clearinghouses because, at least in the US, the big exchanges own their own "captive clearinghouses," so most exchange-traded derivatives are also cleared through the exchange's clearinghouse. But they are two separate functions entirely.
Felix Salmon points out via e-mail that this distinction doesn't necessarily matter, since as EoC mentions, most exchanges also including clearinghouses. But since there still is some debate over whether exchange-trading derivatives is a good or even feasible idea (I'm more bullish on it than EoC), the central point of his post holds true: For reformers, the key is to make sure that clearing is mandated, since it seems to be the truly sufficient condition for effective derivatives reform.
-- Tim Fernholz
