The Securities and Exchange Commission has come under much criticism in the current financial crisis. Many of the problems have indeed arisen in its bailiwick. It was the principal regulator of Bear Stearns and Lehman. It designates and oversees “Nationally Recognized Statistical Rating Organizations,” more commonly known as credit ratings agencies. Though it delegates lot of its authority, it is ultimately in charge of financial reporting for all corporations, and can in principle compel disclosure of terms of swaps and other derivatives on a firm’s balance sheet. The SEC’s mandate prominently features investor protection. Given the large government transfers to private interests, it appears that the investor most in need of protection was the US taxpayer.
To bring order to chaos in group activity, it is not uncommon to suggest a clearing house, i.e., a vehicle for sharing information to improve coordination. The recent financial crisis provides such an opportunity, as market regulators and participants call for a clearing house in credit derivatives (CDs) to help them assess systematic risk exposure and interlinkages. Clearing houses exist in many established financial markets, and they unquestionably contribute to the stability of these markets. What are they and how do they work?