Regulators weigh access vs risk in clearing rules

WASHINGTON (Reuters) - Regulators should be wary of inadvertently increasing risk in the financial system by forcing clearinghouses to accept new swaps business, representatives of the institutions told a hearing on Friday.

The new Wall Street reform law requires that as many over-the-counter derivatives trades as possible should move through central clearinghouses and trade on exchanges or other open venues to reduce risks in the $615 trillion market blamed for helping accelerate the 2008 financial crisis.

But as the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission write detailed rules to implement the law, regulators are wrestling with how best to encourage the migration of OTC swaps to more transparent arenas

"Risk management here is paramount," said Johnathan Short, a senior vice-president of IntercontinentalExchange.

"If you create a system that allows too much risk or unmanageable risk to come into the clearinghouse, we're going to be right back in front of the Congress again with hearings and major problems," Short told the joint CFTC-SEC meeting.

The regulators have the authority under the new law to write rules to prevent conflicts, including ownership and voting limits, rules for governance of clearinghouses, swap execution facilities and exchanges, and access requirements.

The law requires the new rules within 180 days.

A standing-room-only crowd filled the close quarters of the CFTC's hearing room in Washington, a sign of the intense interest in the details of the sweeping swaps regulations.

The meeting was the first in a series the two regulators plan to host on thorny technical issues as they scramble to meet tight deadlines for the dozens of rules required to implement the derivatives portion of the new law. Other topics and dates have not yet been announced

CFTC Chairman Gary Gensler, who has pushed for open access to clearinghouses, did not speak at the hearing, but sat on the sidelines and listened to the spirited debate.

Small swap dealers hoping to gain a bigger foothold in the market, currently dominated by large banks, want ownership caps for banks and other major players involved in clearinghouses to create more competition.

"What we don't want is the same 10 guys holding all the risk, and concentrating that in a clearinghouse," said Jason Kastner of the Swaps and Derivatives Markets Association.

"People will swaddle themselves in the cloak of risk management or financial stability ... to make an anti-competitive stand," Kastner told regulators.

But members of clearinghouses -- who have to foot the bill if another member defaults -- need to have enough capital and risk management experience to ensure the institutions are stable, argued James Hill, a managing director with Morgan Stanley, who spoke on behalf of the Securities Industry and Financial Markets Association.

"If we don't get this right, centralizing all this risk in the clearinghouses, we will become the next too-big-to-fail," Hill said.

Others told the regulators that broader governance for clearinghouse boards and committees could help address issues.

"A small number of independents can keep a board honest," said Roger Liddell, chief executive of London-based LCH.Clearnet, the world's largest derivatives clearer.

Clearinghouses that provide more transparency in how their decisions are made could help ease concerns about access, said Randall Kroszner, a former Federal Reserve governor.

"We are now basically betting the system on the stability of these clearinghouses, and if we're going to do that, we've got to make sure ... they're going to be seen as bulletproof, or as near to bulletproof, as any private institution can be," he warned.

(Editing by Sofina Mirza-Reid)