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Old 03-20-2020, 10:33 PM
China Guy is offline
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Join Date: Mar 2001
Location: Pacific Northwest
Posts: 12,139
Originally Posted by Melbourne View Post
It's a medium deal. It's like as if one of your power generating stations went off line because of the corona virus: it's a big deal for the company involved, it has no effect on you because the other power stations take up the slack, but it indicates that there is a lot happening in the stock market, and it reminds you of what would happen if it all went to shit (like with the GFC/ mortage crisis).

A clearing firm is part of the infrastructure of the stock market. An infrastructure failure would be bad, like the GFC, but the failure of one company is just the failure of one company.

The capital requirement regulations are what save the stockmarket infrastructure from catastrophic failure every week. This company couldn't meet the regulations, so it's been removed from the system. (Or suddenly became much smaller) That is what is supposed to happen, nothing to see here.

Clearing companies handle the mechanics of the buying and selling. They have to have enough money so that if there are bumps in the prices, both sides of the deal still get what they agreed to: the clearing company takes any loss that happens because one side of the deal made promises they can't fulfill (like when I agree to pay, but then go bust before I pay). So, the more people go bankrupt or renege in the middle of a deal, the more money the clearing house has to have to keep the system going. If they run out of capital, they aren't permitted to operate any longer.

This company clearly hit some bumps: the stock market stepped in and sold some of their assets.
Nice summary.