Stephen L. Schwarcz, Professor of Law & Business, Duke University School of Law
Central Clearing of Financial Contracts: Theory and Regulatory Implications
Modern financial regulation requires that derivatives contracts be cleared and settled through central counterparties, such as clearing houses affiliated with derivatives and commodities exchanges, in order to try to reduce systemic risk. In his Working Lunch, Stephen Schwarcz, Professor of Law at Duke University, examined whether regulators should also require the central clearing of non-derivative financial contracts.
In the aftermath of the financial crisis, the Financial Stability Board (FSB) felt that derivatives were inherently risky, given that fact they are debt and volatile. Therefore, by concentrating it on a CCP, the overall systemic risk should be reduced. However, as Schwarcz pointed out, the net counterparty exposure on non-derivative financial contracts greatly exceeds that on derivatives contracts. He raised the question whether derivatives were truly riskier than other types of financial contracts.
As he further pointed out, CCP often started out as special purpose entities (SPE). As they have expanded their tasks, Schwarcz claimed they should be ringfenced as a way to protect other clearing members against the accumulated risk. However, according to Schwarcz, it is very hard to formulate specific laws to achieve this. Typically, regulators don’t direct major financial institutions how to control their risk. He came to the conclusion that even the multi-lateral netting of non-derivative financial contracts does not systematically reduce risk.
Robert Kaplan, President of the Federal Reserve Bank of Dallas
A Discussion of U.S. Macroeconomic Trends and Their Implications for U.S. Monetary Policy
For Robert Kaplan, President of the Federal Reserve Bank of Dallas, technology-enabled disruption is one of the major economic trends, which will shape the future. However, in his opinion the recent drop at the stock market is likely to be a healthy correction instead of the beginning of a new crisis. In his talk at the IMFS Working Lunch, Kaplan shared his insights on macroeconomic trends in the United States, comparing it to the economic development in Germany with Volker Wieland as his interview partner.
With regard to the emergence of dominant technology companies in the United States, such as Google or Amazon, Kaplan pointed out the importance of soft factors. “Apart from investment, you need an ecosystem for such companies”, referring to infrastructure, education and universities. These conditions were abundant in California as well as in the Boston area. However, “passion is the rocket fuel for innovation, not money”, Kaplan concluded. In this context, he also emphasized the importance of education and life-long training. “In the US, we’re lagging behind in helping people getting trained for middle-skill jobs”.
In his opinion, technology-enabled disruption is one of the permanent economic developments in the US, together with the slowing workforce growth and rising government debt. As for the demographic development, Kaplan said that 50 per cent of the workforce growth in the last twenty years was due to immigrants and their children. “This is also a way to grow faster than debt”, he said. He expects the demographic situation to limit the way the central bank will apply fiscal policy in the future. Since September 2015, Kaplan heads the Dallas Fed. He is a non-voting member of the Fed’s policy committee.
Regarding the implications for monetary policy, Kaplan told the audience that higher wages in the United States will not necessarily lead to faster inflation. Although the United States were nearly at full-employment – one of the goals forming the Fed’s mandate – Kaplan was not convinced that this would translate into higher prices because businesses had much less pricing power due to technological advances. According to Kaplan, the Fed should continue to tighten monetary policy. “If you have significant enough overshoot of full employment, history shows that usually other excesses and imbalances build up”, he warned.