Why might that reduce the risk of contagion

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Reference no: EM131303296

An article in the Economist on the Dodd-Frank Act noted the following about a provision of the act that would require that trading in some derivatives be moved from over the counter to exchanges:

The bill would further reduce the risk of contagion by moving derivatives trading onto clearing-houses, which would make it easier to determine firms' exposure to counterparties and would guarantee payment in the event of a default.

a. What does "exposure to counterparties" mean?

b. If it becomes easier to determine the exposure of a bank or another financial firm to counterparties, why might that reduce the risk of contagion?

Reference no: EM131303296

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