Regulators have long extolled the virtues of central clearing, championing it as a favourite solution for managing risk within the financial system. Others, however, have been less enthusiastic about their potential. Concerns in that case have focused on the propensity of CCPs to concentrate wrong-way risk and to create a single-point of failure problem. Regulators, however, seemed reluctant to listen. Until last week that is when the ECB's Benoît Cœuré, gave a speech in which he provided the first hint that regulators may be coming around to the dangers posed by too much central clearing. As he noted in the speech: What I would like to do in my brief introductory remarks is therefore not only to focus on the risks in CCPs, but also and importantly on the risk of CCPs. The risks he identified, meanwhile, were four-fold: First, risk concentration within CCPs will grow, both nationally and internationally. CCPs are increasingly turning into institutions of unprecedented systemic importance. Their failure could lead to very serious systemic disruptions, which is why not only sound risk management, but also an effective recovery and resolution regime for CCPs is key. Second, a growing number of banks will participate in key CCPs across the globe. It is essential that the financial institutions that participate in and rely on CCPs are able to conduct effective due diligence to understand the risks they face as members and take appropriate steps to mitigate those risks. Third, owing to mutualisation, losses and liquidity shortfalls in the event of a member default may spread to other participants. Crisis propagation may be further driven by interdependencies of changing complexity. These can exist between CCPs and other financial institutions, for example, through interoperability arrangements. Note that the same large financial institutions, being clearing members of many CCPs, increase interdependencies even in the absence of interoperability. Finally, existing differences in regulation may lead to regulatory arbitrage and potentially to a race to the bottom. Moreover, the use of a centralised infrastructure depends, in some instances, on exemptions from registration or the application of equivalence or substituted compliance with foreign infrastructures. Where foreign CCPs cannot be used, compliance with mandatory clearing under domestic laws may inhibit cross-border transactions. All of which is certainly a major step forward, though as Craig Pirrong - a long-standing critic of the CCP solution - pointed out on his blog this week, it arguably still fails to account for the greatest risk involved: liquidity risk and namely the tendency for CCPs to suck the liquidity out of the system just when it's needed most: Central clearing can be a source of, or accelerant of, liquidity crises. Big price moves lead to big margin calls lead to spikes in liquidity demand. These are most likely to occur during periods of financial stress, and can greatly exacerbate that stress. Moreover, failure of a CCP is most likely to occur due to the inability of traders to fund margin calls due to the shortage of liquidity. This old article by Andrew Brimmer discusses two episodes I've analyzed on several occasions-the Hunts in silver and Black Monday-and shows how it is liquidity/credit/funding of margin calls for CCPs that can create stresses in the financial system. This is where the systemic risk of clearing arises. But the subject is totally absent from Cœuré"s speech. Which is worrisome. Which implies something is still getting lost in translation. So how does one make clearing more robust? According to Cœuré it's by insisting on higher risk management, liquidity and capital standards on the users" part. But according to Pirrong strengthening CCPs in this way can actually exacerbate the liquidity problems that clearing causes during a crisis. Without wishing to trivialise matters too greatly, it seems increasingly evident that the solution may consequently lie in some form of decentralisation. If the virtual currency phenomenon - which, above all else, is mainly a clearing innovation - has taught us anything it's that relying on a central open-ledger to self-clear trades does have the capacity to de-risk something previously considered impossible to de-risk. True, the system has not yet been tested, and could still fail spectacularly. Also, it's never been applied to a margined or dynamic value system. Collateralisation has never been necessary, because transactions are cleared and closed out real-time. But that doesn't mean the system can't transferred successfully to the world of derivative clearing. After all, we arrived at the central clearing solution from a world of bilateral agreements, self-organised margining and risk management. Central clearing - and the standardised practices it provided - was viewed as an improvement on the opacity and irregularity of the bilateral world, on account of the fact that it allowed risk information to be centralised in the hands of a common intermediary who could take preventative measures. No-one, however, considered the alternative of using a standard risk management protocol and an open transaction ledger to eliminate information asymmetries all round - in so doing allowing the system to self-clear on entirely informed grounds, and thus also paving the way for dynamic self-scrutiny and self-correction on a real-time basis. Predominantly because the players involved would not have been keen on the loss of privacy involved. Transparency may be useful in managing risk, but it also has the undesirable effect of eliminating trading advantage and potential. But, what the virtual currency systems have taught us is that you may be able to have your transparency cake and keep it private after all. And that is an innovation that is certainly worth pursuing. Related links: Dark inventory, a volatility shock absorber - FT Alphaville Regulatory arbitrage: Basel is watching you - FT Alphaville Gorton's battle of light and dark money - FT Alphaville