Someday, and That Day May Never Come...
We came up with a lot of possibilities when we were trying to think of a good metaphor to explain a derivatives clearinghouse.
We asked Satyajit Das to help us out, because he wrote Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives, and because he's a generally affable and insightful fellow. (He also just published a new book, titled Extreme Money: Masters of the Universe and the Cult of Risk.)
We tried out a few different metaphors with him that didn't make it to air...
ECONOMY 4.0: So, Das, is a Clearinghouse like the NFL (a league that manages a whole bunch of different teams and sets the rules of engagement)?
DAS: No, what you're talking about is a regulator. Because the [Clearinghouse or Central Counterparty] CCPs will compete, because it's quite conceivable that around the world there will be dozens of these, and they will offer competitive facilities for people to clear. And it's very likely that's what's going to happen. Like there are different futures and options exchanges with integrated clearinghouses. So it will be a highly competitive process. And the Clearinghouse in no way regulates the market. Their role is very, very specific - it's to guarantee performance of the contract.
ECONOMY 4.0: Is a Clearinghouse like eBay?
DAS: eBay is just a marketplace in which you buy and sell goods. So somebody puts up a Corvette and I'm willing to pay x, y and z. In fact, eBay is very similar to a futures and options exchange. Because you can go onto eBay and buy and sell things. The next part is, okay, you have to pay for that purchase... Now, you can pay by a credit card or you can pay with cash. But generally people don't know each other and there is some degree of mistrust about whether they're going to perform their end of the bargain. So sometimes what you do is use something like PayPal who actually effectively is a conduit for making the payment and ensures that the terms of the contract, particularly the payment terms, are adhered to. So that's the actual analogy that would be relevant.
But the PayPal one is not entirely appropriate, because they generally tend to be one off payments. Whereas one of the problems with derivatives is that you may have a sequence of payments stretching very, very far into the future.
ECONOMY 4.0: Alright Das, we give up. Help!
DAS: OK, the best way to think about the Clearinghouse, is the mafia and "The Godfather"...
And there you have it. A metaphor is born.
Listen to David Brancaccio's story on Marketplace.