Duffie and Zhu argue that a CDS clearinghouse, by removing (quite a bit of) CDS from current bilateral clearing agreements, may actually increase the net risks a bank faces if a counterparty defaults. Essentially their focus rests heavily on the dangers of a clearinghouse failure.

This is really a silly argument. The whole point of having a clearinghouse or exchange is that dealers are coming together to tax themselves to ensure that the market functions well. If the dealers are unwilling to put up the funds necessary to bailout the clearinghouse, then that is proof positive that the market is a negative sum game and does not deserve to exist in a market economy.

Yes, the government might have to bail out the clearinghouse temporarily — but there will also be no rational objection to the complete dissolution of the market after the government does so.