U.S. closer to scrutinizing key clearinghouses

WASHINGTON/BOCA RATON, Florida (Reuters) - Regulators moved closer on Thursday to ramping up supervision of clearinghouses, part of an effort to manage risks in the roughly $600 trillion over-the-counter global derivatives market.

A council of regulators, charged with identifying potential threats to financial markets, sought input on what criteria should be used to decide which clearinghouses should be policed by the Federal Reserve.

Clearinghouses or financial market entities chosen as "systemically important" would also gain access to the Fed's emergency lending facilities, prompting concern from a top financial regulator on the council.

Federal Deposit Insurance Corp Chairman Sheila Bair said she was concerned about "moral hazard" or inducing careless corporate behavior because of a belief the government will always come to the rescue.

"Did a clearinghouse ever come close to failing," Bair said at the Financial Stability Oversight Council's public meeting on Thursday.

Commodity Futures Trading Commission Chairman Gary Gensler said no clearinghouses have failed.

With much of the private derivatives market to be forced through clearinghouses, some of the biggest, including those run by CME Group Inc, the OCC, and IntercontinentalExchange Inc, are expected to get the designation.

The Council, which is led by Treasury Secretary Timothy Geithner and includes the heads of the top financial regulators, plans to start identifying the major derivatives clearing organizations after it finalizes the criteria.

The Council also will finalize criteria for designating non-bank financial firms, such as insurers, as soon as April.

Under the Dodd-Frank reform bill, most of the private derivatives contracts will be forced through clearinghouses, so that the clearinghouse can stand between the two parties and assume the risk if one party defaults.

Derivatives risk would then be concentrated in the clearinghouse instead of the counterparty. Although that too holds a potential threat to the financial system.

CME BALKS AT TWO-TIERED SYSTEM

It is not known whether the smaller clearinghouses such as the Nasdaq-backed International Derivatives Clearing Group will qualify or be tarred with the designation but the industry has been anxiously watching the Council's deliberations.

"I find it hard to believe that there are (designated clearing organizations) that are not systemically important, since what (they) do is help contain systemic risk," CME Group Inc clearinghouse head Kim Taylor told Reuters on the sidelines of the Futures Industry Association meeting in Boca Raton, Florida.

CME is one of the world's largest clearers, and has told its regulator it opposes the idea of a two-tiered system.

"I would think that you would want all clearinghouses to be operating at a level of safety and soundness," she said.

A two-tiered system invites some smaller clearinghouses to try to stay just below the threshold of "systemically important" so as to avoid the extra cost of meeting higher safety standards.

Rules proposed in October by the Commodity Futures Trading Commission, for instance, would require systemically important clearing venues to have enough financial backing to withstand a default by their two largest members.

Clearinghouses that do not receive a designation by the council would only be required to have enough resources to withstand a default by their one largest member.

Also at the meeting, Geithner announced that Michael McRaith will head the new Treasury Federal Insurance Office, which will advise the council but not have a vote. McRaith is an Illinois state insurance regulator.

(Additional reporting by Dave Clarke in Washington; Editing by Tim Dobbyn and Carol Bishopric)