Let’s Make It Clear: How Central Counterparties Save(d) the Day (First Quarter 2010 Business Review)

*The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. he bankruptcy of Lehman Brothers in 2008 will certainly be featured in history books as one of the greatest financial failures so far, but it will also be recorded as yet another episode of the historically successful performance of clearing arrangements in ensuring the resiliency of markets. Recognizing the usefulness of safe and sound clearing and settlement procedures, the Federal Reserve has recently supported the attempt to shift the clearing of some contracts to a central counterparty. In this article, Cyril Monnet outlines the arguments in favor of central counterparty clearing, the economic rationale for trade clearing through a central counterparty, and some possible limits to the advantages of clearing trades through a central counterparty.