The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets

9

The 1987 Crash, Regulation and CCPs

9.1 THE 1987 CRASH

Like the financial market crisis of 2007–9, the 1987 crash started in the US. Unlike the 21st century cataclysm that had many of the qualities of a slow motion train crash, the market break of 1987 became international with the speed of light.

The crash was an early signal of how computerised communications and globalisation could spread trouble as well as prosperity in a world of freer flowing capital. It put the spotlight for the first time on the interaction between the by-now adolescent financial futures exchanges of Chicago and the traditional stock markets of Wall Street. In so doing, it opened the eyes of politicians, regulators and financiers to the infrastructure and financial plumbing that supported those markets.

‘The catalyst for clearing to be considered as a strategic asset or as a critical function came on one date: October 19 1987,’ Phupinder Gill, President of the CME Group, has commented.¹ ‘That date brought the clearing function into extremely sharp focus for the entire world and especially the US derivatives industry.’

‘Black Monday’ came as a shock after several years of rising share prices. The strength of equities was fuelled by the liberalisation of financial markets in the US, UK and leading continental European countries during the 1980s and – since 1985 – greater cooperation between the US and its allies in dealing with global economic problems. The result was greater optimism, reflected in a burgeoning ...