SEC Reducing Systemic Risk by Moving Everything to Clearinghouses, Not Regulating Clearinghouses

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SEC Chairman Mary Shapiro appeared on Squawk Box today for an early celebration of tomorrow's one-year birthday of Dodd-Frank Act. And a happy birthday it will be, at least in the Shapiro household:

And while Dodd-Frank is really in its infancy in many ways, even though we're about to celebrate its one-year anniversary, there are a lot of good things that have been done and there are a lot of positive things to come, I think, over the course of the next year.

Among the key accomplishments she cites is "laying the foundation with the CFTC for the regulation of the 600 trillion dollar over the counter derivatives market." A big part of this foundation is trying to move "standardized" derivatives to clearinghouses, to reduce the risk of Bear/Lehman/AIG-style counterparty risk contagion caused by opaque OTC trades that regulators couldn't examine even if Nassim Taleb would let them. What could possibly go wrong?

We have responsibility for clearing agencies that clear $1.8 trillion worth of transactions every day. We have nine examiners devoted to that function. We have in three of those clearing agencies a sporadic on-site presence. That's just unacceptable. Clearing agencies are critically important to the financial infrastructure, they concentrate risk, their oversight is absolutely essential. Dodd-Frank speaks very strongly to the oversight of clearing agencies and the partnership between the Fed, the CFTC and the SEC in this regard, yet we are not in position to put people on the ground in these institutions looking at how they're conducting business, looking at their risk management, looking at their internal controls, and ensuring that they are not becoming centers of risk as opposed to dispersers of risk.

Oh. That.

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