Closer look at proposed derivatives clearers amid confrontation with banks By Reuters


© Reuters. FILE PHOTO: Four thousand US dollars are counted by a banker in a Westminster bank

By Huw Jones and David Henry

LONDON / NEW YORK (Reuters) – Global regulators have offered a closer look at clearing houses managing trillions of dollars in derivative transactions after calls from banks so that they are better funded to withstand extreme tensions.

The Financial Stability Board (FSB) proposed a more detailed checklist for regulators on Sunday to assess whether clearers have enough funds to cope with large losses, and asks if there are any gaps left to fill.

The FSB coordinates the financial rules of the Group of 20 dominant economies (G20), which undertake to apply them in national practice. The G20 includes the United States, China, Japan and Germany.

Clearing transactions in the over-the-counter derivatives market of $ 640 trillion (OTC) became mandatory after the 2007-2009 financial crisis to make trading more transparent.

A clearing house is located between the two sides of a financial trade to ensure its completion even if one side goes bankrupt.

Losses beyond certain limits are generally attributed to members, such as banks, and in some cases to their customers.

Compulsory clearing has resulted in swelling of clearing houses, as the London Stock Exchange’s LCH cleared a record $ 402 trillion in interest rate derivatives in the first quarter.

These volumes have raised concerns that clearing houses may put taxpayers at the mercy of a crisis or may have to rely heavily on users such as banks.


The FSB said regulators should analyze the arrangements by which the default fund – pre-funded capital dedicated to covering payment losses – and other minimum financial resources would be replenished after covering the losses.

The clearers have just experienced extreme market volatility and record volumes without a major hitch as investors sold in response to the coronavirus pandemic. Markets are facing new tensions as the pandemic is expected to trigger a global recession.

The FSB proposal comes amid a multi-year conflict between clearing houses and their clients.

Last month, a group of nine global banks and investment management firms, including JPMorgan Chase (NYSE :), BlackRock (NYSE :), Citigroup (NYSE :), Barclays (LON ? and German Bank (DE :), clearing houses need to have more of their own risk capital to encourage them to limit risky transactions.

The group also wants to have a greater say in how clearing houses are run as they fear they will eventually make up for losses if the clearers do not have the resources.

They argue that the alignment of risk incentives was disrupted when the major clearing houses became the property of investors rather than their member users.

The CME group (NASDAQ :), which operates a derivatives clearing house, said it is the users who bring the risks and should put money in the default funds.

The FSB document said regulators should determine whether clearing houses should hold liabilities that can be “bailed out” or amortized to fill loss holes, echoing an obligation for global banks since the financial crisis to protect taxpayers.

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