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Clearing Amp Settlement
Clearing house recovery plan urged
From the Financial Times of Wed, 15 Oct 2014 17:21:26 GMT
Bank for International Settlements©Bloomberg

Clearing houses should be given all the tools needed to keep the critical market infrastructure alive rather than close them and risk prevent a future market disaster, global regulators have said.

A report published on Wednesday said it was “essential” that systemically-important market plumbing such as clearing houses should be given every chance to recover from any threat to its financial viability.

In return, they needed to develop rules for members explaining how they would make up the shortfall, the guidelines said. The report was led by the Bank for International Settlements and International Organization of Securities Commissions, an umbrella organisation of the world’s securities regulators.

It forms a key part of a plan by G20 economies aim to end “too big to fail” institutions, whose failure could destabilise the global financial system. Sometimes known as a central counterparty (CCPs), it stands between the parties in a deal and guarantees it will go through even if one side defaults.

After the global financial crisis of 2008, reforms have required more financial contracts to be cleared through CCPs, giving them a pivotal role in the global system. However authorities are equally concerned the risk manager could fall into trouble but have ruled out public bailouts if one of them defaults.

BIS-Iosco has called for clearing houses to be given the tools it needed to allocate any uncovered losses and cover liquidity shortfalls. The regulator also advocated that clearing houses be allowed to replenish any funds it used after a “stress event”.

“These tools may include collecting resources from its participants by means of cash calls and raising additional equity capital,” it said.

The issue has led to a sometimes fierce debate between clearing house operators and their members, mainly banks, over who would pay if the CCP had a shortfall of funds to cover a default.

Some, such as JPMorgan have called for clearers to have larger financial buffers to prevent triggering a future market disaster. Known as “skin in the game”, its advocates say it incentivises clearing houses to pay closer attention to their risk management practices.

Pimco, the world’s largest fixed income fund, has also called for clearers to CCPs should perform periodic stress tests and that client assets should only be accessed as a last resort.

Clearing houses have argued that new legislation such as the European Market Infrastructure Regulation (Emir) and the US Dodd-Frank Act have already forced them to increase their capital buffers. They have also argued their risk management policies are different from banks.

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