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Prime Brokers and Derivatives Dealers

Author: Squam Lake Working Group on Financial Regulation

Prime Brokers and Derivatives Dealers - prime-brokers-and-derivatives-dealers

Publisher Council on Foreign Relations Press

Release Date April 2010

6 pages

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Overview

Runs by prime-brokerage clients and derivatives counterparties were a central cause of the global financial crisis. These runs precipitated the failures of Bear Stearns and Lehman Brothers by substantially reducing the broker’s liquidity. This Working Paper, the ninth in the Squam Lake series distributed by the Greenberg Center for Geoeconomic Studies, argues for higher regulatory liquidity requirements for dealer banks that use assets of clients and counterparties as a source of liquidity.

More About This Publication

The Squam Lake Working Group on Financial Regulation is a nonpartisan, nonaffiliated group of fifteen academics who have come together to offer guidance on the reform of financial regulation.

The group first convened in fall 2008, amid the deepening capital markets crisis. Although informed by this crisis—its events and the ongoing policy responses—the group is intentionally focused on longer-term issues. It aspires to help guide reform of capital markets—their structure, function, and regulation. This guidance is based on the group's collective academic, private sector, and public policy experience.

To achieve its goal, the Squam Lake Working Group is developing a set of principles and their implications that are aimed at different parts of the financial system: at individual firms, at financial firms collectively, and at the linkages that connect financial firms to the broader economy.

The members of the group are

Martin N. Baily
Brookings Institution

Andrew B. Bernard
Dartmouth College

John Y. Campbell
Harvard University

John H. Cochrane
University of Chicago

Douglas W. Diamond
University of Chicago

Darrell Duffie
Stanford University

Kenneth R. French
Dartmouth College

Anil K Kashyap
University of Chicago

Frederic S. Mishkin
Columbia University

Raghuram G. Rajan
University of Chicago

David S. Scharfstein*
Harvard University

Robert J. Shiller
Yale University

Hyun Song Shin†
Princeton University

Matthew J. Slaughter
Dartmouth College

Jeremy C. Stein
Harvard University

René M. Stulz
Ohio State University

*David Scharfstein withdrew from the group when he accepted a position at the Treasury Department in September 2009.

†Hyun Song Shin withdrew from the group in January 2010 to serve as chief adviser on international economics to South Korean president Lee Myung-bak.

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