Journal of Financial Market Infrastructures

A bill of goods: central counterparties and systemic risk

Craig Pirrong


A truly systemic analysis of the impact of clearing demonstrates that the effects of mandated clearing on systemic risk are ambiguous at best. Some aspects of clearing, such as netting and collateralization, redistribute risk rather than reduce it. Expanding clearing makes the financial system more tightly coupled and transforms credit risk into liquidity risk. Moreover, clearing creates wrong-way risks. When all of the effects of clearing are considered holistically, it is evident that mandated clearing was oversold as a means of improving the stability of financial markets.