The Clearing Debate

The Clearing Debate

Behind the G-20 commitments on the financial markets is the belief that some of the key dangers arising from the collapse of Lehman Brothers could be laid at the door of the bi-lateral over-the-counter market in derivatives. In short, it is believed that the lack of centralised clearing for the considerable number of OTC derivatives, contributed to the instability of the time. Concerns about the OTC derivatives market arose because of the fragmented nature of trading in this market, the fact that it was decentralised which made positions difficult to assess and that those bi-lateral exposures were often inadequately collateralised. In addition, the bilateral nature of the market led to the possibility of default cascades.