Most market experts agree that putting OTC into central clearing is a bad idea born from good intentions, but terrible knowledge of market operations and how to reduce risks. To the politician and the regulator its simples!

CCPs operated extraordinary well during the height of the financial crisis and prevented the complete breakdown of global markets, saving the bacon of any number of financial services firms and the people that managed them. Hence their idea of let’s put all our risk and complicated OTC into central clearing and the Clearers will solve the risk problem, or at least all the eggs will be in one basket. The crass stupidity of this line of thinking does not bare examination, so I won’t even go there.

The idea I propose, as a better and more viable solution is; create a cartel of all the leading global banks, of say the top ten that all have balance sheets bigger than most countries, and allow them to operate as single market structures. That is they are able to trade/invest/clear and settle within their own systems/offices. In fact the vast majority of transactions would settle as book entry and not entail expensive movements of stock or collateral.

The days end would enable netting off of banking positions and single payments between the banks. Each bank would indemnify each other and if there was pressure or trouble brewing, the banks would effectively protect each other’s position. This would take out most of the risks in the market but allow competition on processes and services between the banking cartel.

Outside of the cartel the markets would trade/invest as niche players using existing market structures and mechanisms. On some occasions they would deal with the cartel but not necessarily.

This structure puts liability of OTC and exchange traded products with those institutions that are best placed to manage them, without a drain on central bank money, although central bankers would monitor activity and could be the central clearer of payments between the cartel.

Although this creates a two tier market it actually places the risks and the capability to manage those risks and operate the best possible services across product ranges with those best positioned to manage them -the Banks.