When Alice looked up, the White Rabbit had returned.
‘This is a very strange regulation’, said Alice.
‘Not at all,’ replied the Rabbit, ‘it is necessary for financial stability. Too many CCPs are considering interoperation. Why only the other day the Ruritanian equity derivatives CCP proposed an interoperation agreement with the Atlantis credit derivatives CCP, the better to support capital structure arbitrage hedge funds. If we let this kind of thing happen, who knows what kind of economic efficiency might result. CCPs are such a good idea we need to impose a CCP for CCPs.’
‘So a CCPCCP…’ mused Alice.
‘…is a CCP that only clears intra-CCP transactions, yes, do keep up’, said the White Rabbit. ‘Their use will be mandatory in Wonderland from 2014. CCPs will have to post margin to their CCPCCP, and in return the CCPCCP will guarantee intra-CCP trades. It’s a huge boon you know.’
‘To who?’ asked Alice.
‘Why to the financial system, of course,’ replied the White Rabbit. ‘Taking trillions of dollars of derivatives out of well-capitalised banks and putting them into CCPs was so successful that we had to repeat the idea. So we’re taking most of the exposure out of CCPs and putting it into CCPCCPs with wafer-thin amounts of capital. What could possibly go wrong?’
‘Dear, dear! How queer everything is to-day! And yesterday things went on just as usual. I wonder if the financial system has been changed in the night?’ said Alice.
‘I don’t know what you mean I’m sure’ said the White Rabbit snatching up his regulation and walking off.
Suddenly, as if from far away, she heard a new voice.
‘Wake up, Alice dear!’ said her boss; ‘Why, what a long sleep you’ve had!’
‘Oh, I’ve had such a curious dream!’ said Alice, and she told her boss, as well as she could remember them, all these strange Adventures of hers that you have just been reading about; and when she had finished, her boss had a strange gleam in his eye, and said, ‘It WAS a curious and suggestive dream, Alice, certainly: but now run in to your meeting; it’s getting late.’ So Alice got up and ran off, thinking while she ran, as well she might, what a peculiar dream it had been.
DEM is now on summer break: we will return at some point later in August.