Over the weekend, Shahien Nasiripour had a writeup of this second derivatives loophole issue. Inside the second derivatives loophole issue is two issues, one being the penalties for not trading on a clearinghouse and the second being what if a clearinghouse turns down a derivative:
Furthermore, the email points out, even though federal regulators may require that a swap be cleared, they can’t mandate a clearinghouse to accept it.
Parties wanting to enter into a typical derivatives contract usually go through a middleman called a Futures Commission Merchant (FCM). The entities will then take the contract and submit it to a clearinghouse. These merchants have the authority to reject contracts.
The biggest futures commission merchants are owned by the largest banks, according to data collected by the CFTC. The largest banks also act as the dealers of derivatives. The big banks dominate the market. They also stand to lose the most revenue because of the increased transparency.
Let’s say you wanted to keep a derivative that has been flagged for clearing in the “dark”, off the grid of clearing and swap execution facilities. One way is to simply not put it through the clearinghouse. There are penalties for doing this if the CFTC wants to enforce it. Why not make those explicit, and allow market players more clear right in the law? You’d be sure it would get enforced if these rights were broadly distributed rather than through the coin toss of who is running the government that year. <snip>
Full explanation at link:
http://rortybomb.wordpress.com/2010/05/20/derivatives/