http://www.bis.org/review/r141110b.pdf
Jerome H Powell: A financial system perspective on central clearing of
derivatives
Prior to the crisis, the then highly opaque market for
OTC derivatives grew at an astonishing
and unsustainable pace of nearly 25 percent per annum in a context of relatively light
regulation and bilateral clearing.1 With the benefit of hindsight, we know that along with this
torrid growth came an unmeasured and underappreciated buildup of risk. The spectacular
losses suffered by American International Group, Inc., or AIG, on its derivatives positions,
and the resulting concerns about the potential effect of AIG’s failure on its major derivatives
counterparties, serve as particularly apt reminders of the wider failures and weaknesses that
were revealed by the crisis.
The threats posed were global, and the response was global as well. In September 2009, the
Group of Twenty (G-20) mandated that all sufficiently standardized derivatives should be
centrally cleared – a sea change in the functioning and regulation of these markets. And in
the five intervening years, substantial progress has been made in the United States and
abroad to implement this reform and begin to reduce systemic risk in these markets.
According to public data,
roughly 20 percent of all credit derivatives and 45 percent of all
interest rate derivatives are now centrally cleared – amounts that have grown substantially
since 2009, when central clearing of credit derivatives began and the amount of cleared
interest rate derivatives was at roughly one-half of its current level.2 These amounts should
continue to grow over time as central clearing and, especially, client clearing requirements
take effect in more jurisdictions.
A Governor of the Federal Reserve comments on how the central banks of the world CLEARED THE DERIVATIVE BETS...............
20 to 45% CLEARED VIA FIAT CURRENCIES OF THE WORLD..........................
The derivatives markets exploded before the meltdown..............
