Central CDS clearinghouse a bad idea?

People seem resigned to the idea of a central clearinghouse for standardized CDS contracts. The fact that the Obama Administration has thrown its weight behind the idea can't be discounted. Neither can the launch of various clearinghouses already. But what about Knight Capital's NetDelta netting and settlement platform? The big issue is risk. A clearinghouse in essence spreads risk across all market participants.

"There's the possibility that in the event of a counterparty default, you may never have had transactions with that counterparty," says an executive to Wall Street & Technology. "But you are on the hook because a CCP neutralizes risk across all the counterparties. It brings it down to the lowest common denominator." NetDelta on the other hand focuses on netting trades between counterparties that cancel each other out to reduce risk. The two trading entities are still on the hook in terms of default risk and no third party gets involved. In both cases, collateral gets posted by trading entities. 

For more:
- here's the article

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