To protect economic stability, postcrisis regulation requires financial institutions to clear and settle most of their derivatives contracts through central counterparties, such as clearinghouses associated with securities exchanges. This Article asks whether regulators should expand the central clearing requirement to nonderivative financial contracts, such as loan agreements.
This Article begins by theorizing how and why central clearing can reduce systemic risk. It then examines the theory’s regulatory and economic efficiency implications, first for current requirements to centrally clear derivatives contracts and thereafter for deciding whether to extend those requirements to nonderivative contracts. The inquiry has real practical importance because the aggregate monetary exposure on nonderivative financial contracts—and thus the potential systemic risk that could be triggered by that exposure—greatly exceeds that on derivatives contracts. The inquiry also raises fundamental legal questions as to why (and the extent to which) regulators should tell financial institutions how to control risk and whether to require the mutualization of risk.