Global regulators impose tougher rules on clearers

Mon Apr 16, 2012 9:35am EDT

* No clearer meets the tougher new rules so far

* Costs for users of clearing houses set to rise

By Huw Jones

LONDON, April 16 (Reuters) - Top clearing houses for stock, bond and derivatives trades must hold enough capital by the end of this year to stay in business if two of their biggest customers go bust, global regulators said on Monday.

Clearing houses like LCH.Clearnet and Eurex Clearing must also draw up "living wills" or wind-up plans that can be activated if they get into trouble so that customers' assets remain protected.

The requirements are part of a package agreed jointly by a Bank for International Settlements committee (CPSS) and global securities watchdog IOSCO. The aim is to ensure that clearing houses, payment systems and settlement houses are robust enough to handle anticipated heavier demand.

"At the moment no one will be meeting these rules so this will require some effort from the industry to raise the bar and assure a higher level of protection for investors," said CPSS member Daniela Russo from the European Central Bank.

"They will require more financial resources and they will have to improve the quality of collateral as much as they can," Russo said.

The Group of 20 top economies (G20) has already pledged to introduce the tougher rules by the end of 2012.

"With these new principles, authorities have a good basis on which to ensure a safe and stable financial infrastructure," said Paul Tucker, Deputy Governor of the Bank of England and chairman of the CPSS committee.

Policymakers were alarmed after the collapse of U.S. bank Lehman Brothers in 2008 at the lack of transparency in the $700 trillion derivatives market that is mainly traded among banks.

The G20 has agreed that contracts are cleared where possible, a process backed by a default fund and which paves the way for ownership of a security to be exchanged for cash.

"The users will have to pay but they will benefit from a higher level of protection," Russo said.

Some users may benefit from posting less collateral as more of their contracts are netted against each other during clearing, she added.

Another innovation is a requirement to force clearing houses and settlement systems to write a "living will", spelling out what would happen if they got into trouble.

"The plan should contain, among other elements, a substantive summary of the key recovery or orderly wind-down strategies, the identification of ... critical operations and services, and a description of the measures needed to implement the key strategies," the new rules say.

Clearing houses must also have rules and procedures to make sure that if they are in trouble, their customers' positions and accompanying collateral can be moved to another clearing house.

The rules require clearing houses to make public the criteria for using them and "which permit fair and open access".

The regulators also published consultation papers on how supervisors in the G20 countries can assess whether the new rules are being complied with.

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