A central question for corporate law scholarship has revolved around the ownership structure of enterprises. Why are some businesses owned by employees, some by customers, and some by investors? Until now, the question has centered on the relative benefits offered to these stakeholders by one form or another. This Article explores how ownership structure can be a matter of public importance for financial stability, and proves that it is so by delving into an institution of immense importance and timeliness: the clearinghouse, a critical financial market infrastructure.
Clearinghouses process, settle, and guarantee the performance of several trillion dollars in securities and derivatives trades daily. By operating as central counterparties, they act as private stability mechanisms, reducing counterparty credit risk and sharing default risk among their members. Clearinghouses achieve this result via a unique economic structure, which includes a double layer of capital: the traditional equity capital and the so-called mutual guaranty fund (the clearinghouse’s loss sharing fund).
Historically, clearinghouses have been mutual enterprises owned by their members (users), who contributed to the firm’s mutual guaranty fund. But most clearinghouses have recently demutualized their ownership structure, opening their equity capital to external investors and transforming into for-profit public corporations, while keeping members on the hook for losses. This structural evolution has catalyzed new agency costs between the now coexisting and “competing” stakeholders: members and external shareholders. These costs, which have been further exacerbated by the post-crisis systemic role of clearinghouses, are exemplified by shareholders with control and economic rights but limited “skin in the game,” and members who bear the final risk and losses if things go south, but who have no control or monitoring rights. This Article identifies how the agency costs between members and shareholders threaten the financial stability of clearinghouses and argues that aligning control and monitoring rights with final risk-bearing costs is the path clearinghouses should follow to achieve a more resilient ownership and governance structure.