Speech by Chairman Ben S. Bernanke At the 2011 Financial Markets Conference, Stone Mountain, Georgia, April 4, 2011 – Clearinghouses, Financial Stability, and Financial Reform
“Clearinghouses have been around a long time and have been used for many types of transactions, yet virtually all clearinghouses perform certain basic functions. Notably, by centralizing and standardizing specific classes of financial transactions, clearinghouses reduce the costs and operational risks of clearing and settlement among multiple market participants. In many cases they also act as a guarantor of transactions–the counterparty to every trade–thereby helping to reduce counterparty credit and liquidity risks. However, the flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations, a development with potentially important systemic implications. Because the failure of, or loss of confidence in a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently, about the financial positions of clearinghouse participants and their customers, strong risk management at these organizations as well as effective prudential oversight is essential.”
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