Big U.S. banks want more detail from clearers on risk controls

NEW YORK Tue Feb 5, 2013 12:00pm EST

NEW YORK Feb 5 (Reuters) - U.S. securities clearinghouses should reveal to their members details on how they plan to protect against defaults and how they invest members' margins, large U.S. banks said on Tuesday, among other recommendations.

The so-called Payments Risk Committee, a group of banks which is overseen by the Federal Reserve Bank of New York, made a series of recommendations meant to safeguard the plumbing of financial markets against costly breakdowns that sap investors' confidence.

The recommendations, which are not legally binding, would improve the ability of banks and other clearing members to "measure, monitor, and assess their exposures to and activities" with clearinghouses, "further supporting a more stable overall financial system," the 48-page report said.

The U.S. central bank does not formally back the recommendations, though it supports the committee's work generally, a senior New York Fed official said. Instead, the clearinghouses are urged to voluntarily take them up.

Private, over-the-counter trading of complex securities played a role in the 2007-2009 global financial crisis, which brought on the deepest U.S. recession in decades.

Lawmakers and regulators responded by requiring that far more derivatives be cleared by co-called central counterparties such as LCH.Clearnet and CME Group Inc, which stand between parties to trade and guarantee obligations even in the case of a default.

The new focus on clearing has brought anxieties.

In the futures market, for example, the collapse of brokerages MF Global Inc in 2011 and Peregrine Financial Group in 2012 led to steep losses, undermined confidence, and raised questions over clearinghouse margins and guarantee funds.

CME, LCH and IntercontinentalExchange Inc participated in the committee's meetings. In the spotlight since the crisis, such entities already provide much information to regulators and members on how they clear trades.

But the report issued on Tuesday said clearinghouses "may need to allocate incremental resources and introduce new data compilation approaches" to meet the recommendations.

The recommendations could help banks better understand how clearinghouses run and manage any related risks.

The committee wants clearers to be more transparent about the steps they would take to deal with the default of a clearing member, and to provide an overview of their investment policy for the initial margins and default-fund contributions submitted by members.

Clearinghouses would also provide more information on their collateral structures, and on the way they evaluate and monitor the credit-worthiness of members, among other recommendations.

Among the banks involved were JPMorgan Chase & Co, Morgan Stanley, Goldman Sachs Group Inc and Bank of America.

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