Red-Blooded Risk: The Secret History of Wall Street

Clearinghouses

I don't want to get too far into the minutiae of financial operations, but it is worth remarking that the derivative economy has a complex structure. Clearinghouses are composed of clearing firms, each one representing a pool of mutualized risk. Many clearing firms are members of multiple clearinghouses, whereas others are relatively tiny operations and work only with a single clearinghouse. If you enter into a public futures contract, you will post margin with a futures commission merchant (FCM). That entity will aggregate your margin and your trades with those of its other customers, and deposit some of the margin with the clearinghouse. As long as everyone does their job properly and no contract prices move farther than the required margin amount in a day, everything gets paid off in full, like a sound bank.

If someone doesn't do their job, or if prices move too much, there will be a loss imposed on someone. Whether that someone is you depends on the financial strength of the clearinghouse, the financial strength of your FCM, and the equity of the pool of contracts your FCM cleared for all its customers. People often say that no clearinghouse has ever gone broke. I'm not sure that's true. For years, I have challenged people who say it and none has yet produced an authoritative source. I think what people mean is no clearinghouse in the past 40 years or so has failed, and anything that failed before that was too small or obscure to make the national or international ...