The finance bill being hashed out in Congress may create a new class of too-big-to-fail institutions: clearinghouses.
Clearinghouses guarantee trades even if the company on one side of a trade goes bankrupt.
The bill is likely to require many more derivatives to be traded through clearinghouses. The idea is to make the financial system less risky.
But what happens if there's a crisis and a big clearinghouse runs out of money?
When there's no clearinghouse, the company on each end of a derivatives deal takes a risk that the company on the other end of the deal will go bankrupt, and won't be able to pay up.
If you put a clearinghouse in the middle of the deal, that risk doesn't disappear. It just gets shifted onto the back of the clearinghouse.
Clearinghouses do a good job of managing risk, according to Michael Greenberger, a University of Maryland law professor and former derivatives regulator.
"Because they know there's no free safety out there that's going to save them, they've been very prudent," Greenberger told me.
But details in the finance reform bill that are still being hashed out could change that.
One section of the bill passed by the Senate expressly prohibits federal bailouts of the derivatives market.
But another section suggests that clearinghouses may be allowed to borrow from the Fed at a low interest rate, like banks. That guarantee could encourage clearinghouses to take more risk.
Gary Gensler, who heads the federal agency that regulates derivatives, recently said he opposes allowing clearinghouses to borrow from the Fed in ordinary circumstances. But, he said, they should be able to do so in an emergency.
As envisioned in the Senate bill, a big clearinghouse could hold so much risk, affecting so many companies, that allowing it to fail could send the economy into chaos.
"It would be a practical necessity for the government to do something," Wallace Turbeville, who worked for Goldman Sachs in the 1990s and has been writing about clearinghouses for the blog New Deal 2.0, told me.
Turbeville has suggested requiring the companies that participate in the derivatives market to pay back any bailouts that clearinghouses need. That idea is similar to what's been suggested for big banks, in the aftermath of a bank bailout.
Of course, that idea only works if the companies have the money to pay for the bailout.