OTC derivatives evolved as bilateral trades in which the parties relied on each other’s credit to fulfill any obligations that arose without the benefit of a clearinghouse guarantee. The Lehman Brothers collapse reminded participants of the risks—at first, nobody even knew how much Lehman owed or to whom—and spurred calls for reform. Legislators in the United States and Europe decreed that central clearing be extended to as many OTC derivatives contracts as possible, which in practice means the plain vanilla versions of interest rate swaps, credit default swaps, foreign exchange swaps and equity swaps. The idea is not a radical departure. Neil A O’Hara reports.
