Senator Sherrod Brown wants the financial reform legislation currently being debated to limit the size of stakes that derivatives trading firms can hold in clearinghouses. The idea is that the entities trading through these central counterparties shouldn’t make their rules, or there is the possibility they will be too liberal and not reduce systemic risk adequately. Is this something Treasury should weigh in on?
Well, it’s not clear that such an amendment will be successful in the Senate. However, the House version of the legislation does contain such a limit. And there is still hope that senators will cut a deal to exempt corporates from requirements that they trade through central counterparties, as the House has.
But if companies do need to clear through central counterparties, the ownership issue becomes important. Putting a hard 20 percent limit on ownership, as proposed, wouldn’t do much to temper risk. Having five entities on the hook to absorb losses is hardly sufficient in multi-trillion-dollar markets.
It makes more sense—and this is Senator Brown’s approach—to give regulators the authority to police ownership to ensure that it is broad enough to disperse risk and that it is managed in such a way that nonfinancial end users such as corporates are treated fairly.