EU close to addressing too-big-to-fail financial clearing house issue

CMEAnnouncement

25/11/2019 16:05

* Draft rules could set global regulatory standard
    * Clearing houses now seen as "too big to fail"
    * Rules to ease burden on banks in clearing failures

    By Francesco Guarascio
    BRUSSELS, Nov 25 (Reuters) - European Union governments are
close to agreeing new rules for handling failures of clearing
houses, increasing the burden on these firms to limit losses
that might rock the financial system, EU documents and sources
said.
    The rules could set a global standard for regulators, which
put clearing houses at the centre of trading in over-the-counter
derivatives and interest rate swaps after the 2008 financial
crisis but did not agree on how to wind them down safely.
    To lower risks in the multitrillion-dollar derivatives
trade, clearing houses stand between both sides of a transaction
and ensure its completion even if one side goes bust.
    But the system is so reliant on them that they have become
what analysts describe as "too big to fail", meaning they are so
large that a collapse would send shock waves around the global
financial system that could force governments to step in.
    In what would be a major regulatory shift, EU governments
are set to agree draft rules that would clearly define how to
address clearing house failures, putting a higher financial
burden on them and reducing costs for banks and other clients.
    Draft documents prepared by the EU's Finnish presidency and
seen by Reuters say clearing houses, also known as central
counterparties, should use their own resources to cover losses
"before resorting to other recovery measures requiring financial
contributions from clearing members."
    This would double clearing houses' contributions in a crisis
to 50% of capital they are required to set aside by regulators
against losses.
    Finland has secured a broad consensus on the draft rules so
they will be adopted by EU governments if no objections are
raised by a large number of them by Tuesday evening, two sources
familiar with the matter told Reuters. The EU parliament also
needs to approve the rules.
    The clearing business is concentrated in a few houses
primarily owned by the London Stock Exchange Group plc  LSE.L ,
International Exchange Inc  ICE.N  and CME Group Inc  CME.O .
Most trades cleared through them come from about 10 big banks.
    When one party in a transaction, whether a bank or fund,
cannot meet its commitments, it is first to pay for its failure
by using backstop capital set aside before the transaction.
    If that is not enough, under existing rules, clearing houses
contribute up to 25% of their capital, before a default fund
financed by banks and other clearing clients is used.
    The draft rules would force central counterparties to put up
more of their own capital if the default fund was not sufficient
to cover losses. Banks would need to pay extra cash only if this
effort from clearing houses were still not enough.
    But the draft does not explicitly require central
counterparties to raise more capital after a recovery, leaving
it unclear how they would close any gap opened by their crisis
contributions.
    It also remains unclear how the new rules would apply to
Europe's largest clearing houses, which operate from London,
after Britain leaves the EU.     

 (Reporting by Francesco Guarascio; Editing by Edmund Blair)
 ((Francesco.Guarascio@thomsonreuters.com; +32 2 287 68 17;))