Back to the futures?

From Free exchange
February 4, 2013 - 5:32pm
HISTORICALLY, futures exchanges have been very effective at preventing the failings of individual traders from hurting others. That is one reason why America’s Dodd-Frank law introduced new rules for over-the-counter (OTC) swaps designed to make them more like futures. (“Swap” is a broad term for many types of financial derivatives directly agreed between two parties, including credit default swaps and currency forwards. The most common is the interest rate swap, which allows people to transform floating-rate debt into fixed-rate debt and vice versa.) In particular, policymakers want greater transparency and central counterparty clearing. If swaps are traded on exchanges rather than negotiated bilaterally, regulators and market participants should have an easier time measuring—and containing—systemic risk. (Customers should also get better prices.) Likewise, having a clearingho...

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