Thursday, April 1, 2010

UK House of Lords raise questions over clearing houses

Original posted in the Financial Times by Jeremy Grant:

Clearing houses cannot be supervised by European Union authorities because the EU does not have the financial resources to bail out a large clearing house that runs into difficulties, a report by the upper house of the British parliament said on Wednesday.

The House of Lords report was published as debate escalated over how clearing houses should be regulated and supervised in the wake of the financial crisis.

Clearing houses – or central counterparty clearers (CCPs) – run the post-trade “plumbing” that supports the trading of many financial instruments, usually on exchanges.

But they have become central to efforts to clean up after the crisis, with regulators in the US and Europe pushing for more use of clearing in the vast over-the-counter (OTC) derivatives markets.

There are growing concerns about the fresh systemic risks that might arise from CCPs taking on large amounts of clearing.

There is also no agreement about how CCPs should be supervised and regulated.

The European Commission, in its proposals on OTC derivatives reform, has suggested that a pan-European body such as the planned European Securities and Markets Authority (ESMA) be granted powers to authorise CCPs to operate in the EU and that it may be given supervisory power over them as well.

However, in its report, a committee of the Lords chaired by Baroness Cohen of Pimlico, said the “political reality” was that the cost of any failure of a financial institution, including a CCP, would be borne by the government of an EU member state in which the CCP was situated.

“We recognise that the absence of any cross-border fiscal burden-sharing arrangements for failing financial institutions means that supervision of CCPs at EU level is probably unrealistic,” the report said.

One senior expert at a clearing house said: “The [EU] structures aren’t there to bail out any particular entity, whether it’s Greece or a CCP. And how would you divvy it up between different countries’ taxpayers?”

The Lords report comes three months after the UK’s views on OTC derivatives reform were first laid out in a report by the Treasury and the Financial Services Authority.

The Lords was generally supportive of the Commission’s proposals to ensure that more OTC derivatives are traded on exchanges and other electronic trading platforms; that they be as far as possible processed through CCPs; and that transparency be increased by use of trade repositories to record OTC derivatives contracts.

However, it opposed any blanket clearing requirement for OTC derivatives, and argued that there were certain “bespoke” contracts that should be left uncleared because they met the “specific needs of corporates [companies]”.

No comments: