Financial Markets Uncertainty and the Rawlsian Argument for Central Counterparty Clearing of OTC Derivatives

This Article offers a critical examination of the arguments against CCP clearing and a defense of the mandate and other Dodd-Frank Title VII derivatives provisions. Beginning with the fundamental uncertainty about the true causes of the crisis that remains, it then examines the arguments against CCP clearing, finding that they rely on overly narrow boundaries in order to achieve a measure of precision in making a cost-benefit analysis, thereby ignoring many of the important costs that derivatives indirectly contributed to. Given that a more complete cost-benefit analysis appears to run aground on the complexity of accurately enumerating all the costs and benefits associated with modern financial markets, this Article instead proposes looking at the problem of derivatives regulation through a Rawlsian framework. Central to Rawls’s thought is the procedure of decision-making under conditions of fundamental uncertainty, or the maximin rule. I argue that application of the maximin rule is appropriate here, and that unlike the standard cost-benefit analysis grounded in utilitarianism, Rawls’s views lead to a holistic understanding of the financial markets in their larger societal context that both guides and justifies legislative action in the context of fundamental uncertainty by prioritizing the safety of the financial system. Such a holistic understanding of economic regulation is necessary as governments struggle to preserve social stability in the face of widespread economic challenges such as unemployment, income inequality, excessive debt, and instability in the financial system