Clearing houses face tougher crisis management scrutiny

Global regulators have tightened their scrutiny of whether clearing houses hold enough capital and cash to avoid calling on taxpayers in a crisis, according to new guidelines published on Monday by the Financial Stability Board (FSB).

However, a key demand from a group of major global banks and investors that clearing houses themselves should take on more of the financial burden of any market losses has been kicked down the road.

The FSB, which coordinates financial rules for the Group of 20 Economies (G20), said the recent market turmoil due to the COVID-19 pandemic had demonstrated the benefits effective clearing brings to markets.

Clearing houses are already required to have default funds to ensure a trade is completed even if one side of a transaction goes bust, and the fund must be big enough to cope with its two biggest members failing.

The new guidance also now sets out how the default fund must be replenished after covering losses.

But the shift to central clearing of derivatives to improve transparency in markets since the financial crisis a decade ago has further increased the systemic importance of clearing houses and more work was needed, the FSB said.

Such work next year will consider rules on the use, composition and amount of financial resources clearers should have if they find themselves on the brink of collapse and need "resolving", or closing down, it said.

"This would include assessing whether any new types of pre-funded resources would be necessary to enhance central counterparty resolvability," the FSB said.

Earlier this year, nine global banks and investment management companies said clearing houses needed to have more of their own capital at risk as an incentive to limit risky trading.

The group also wants a bigger say in how clearing houses are run as they worry that they, as members, will end up plugging the losses if clearers are not properly resourced.

However, clearers argue that it is members such as banks that create the risk and therefore they should be contributing to the clearers default fund.