University of Houston Finance Professor Craig Pirrong argued that a recent Office of Financial Research ("OFR") working paper by Samim Ghamami and Paul Glasserman was "careful" and "precise" in identifying crucial factors but asked the wrong questions about central clearing. In a recent blog post, Professor Pirrong took issue with the OFR researchers for asking whether OTC derivatives reform incentivizes central clearing instead of focusing on more important questions: (i) should central clearing be favored, (ii) how do different approaches affect the allocation of risk, (iii) how do the new rules affect the scale of derivatives trading, and (iv) what are the implications of those rules for the broader economy?

Professor Pirrong also criticized the paper for (i) ignoring the impact of the leverage ratio on central clearing, (ii) concentrating on credit risk and not addressing liquidity risk, and (iii) emphasizing "netting economies" without recognizing that the "effects of netting are distributive."

Professor Pirrong also argued that:

"these types of analyses . . . are profoundly non-systemic because they don't identify where in the financial system the risk goes. If anything, they distract attention away from the questions about the systemic risks of clearing and collateral mandates. Recognizing that the choice between cleared and bilateral trading is driven by netting, and that netting redistributes risk, the question should be whether that redistribution is desirable or not. But that question is almost never asked, let alone answered."

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