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Derivatives exchanges prove resistant to regulatory change 

December 23, 2014
David Henry, Reuters

In December 2013, Hanmag Securities Corp, a small South Korean brokerage firm, lost 46 billion won ($42 million) in a day after a stock option trading algorithm went bad. It was a fatal blow for a company that had just 15 billion won of capital — Hanmag went bust.

What happened next rattled regulators around the world: Hanmag defaulted on its obligations, forcing the Korea Exchange's clearinghouse to tap its emergency funds.

Clearinghouses are a critical part of regulators' efforts to fix the financial system after the crisis, and they have grown much larger in recent years. Seen as a way to ensure that banks are not too connected to fail, clearinghouses can guarantee that if one party in a derivatives trade can't meet its obligations, other banks it trades with will still get the money they are owed.

During the financial crisis, regulators were reluctant to let wobbly traders such as Bear Stearns go bust, fearing that a failing bank would default on derivatives trades with other market players, which in turn would default on obligations with others, potentially spiraling into a systemic meltdown.

Read more: Reuters

 
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