LONDON Dec 18 Clearing houses hoping for a rich
pickings from stricter derivatives rules face spot checks to
make sure they are investing enough money in risk management,
the Bank of England said.
World leaders have agreed that the $650 trillion markets for
credit default swaps, interest rate swaps and other derivatives
traded among banks should be centrally cleared from next year to
Central clearing ensures transactions are backed by a
default fund in case one side of a deal goes bust.
The prospect of larges swathes of derivatives having to be
cleared has prompted clearing companies such as NYSE Euronext
, CME, and others to bulk up.
The BoE, outlining how it will supervise clearing houses
from April, said on Tuesday its key concern will be to ensure
financial stability was maintained in the public interest.
"If financial market infrastructures are operated only in
the private interests of their managers, owners, or even their
members, they may underinvest in the mitigation of risks to the
wider system," the BoE said.
Clearing houses should make sure that senior management pay
did not "create pressure to prioritise revenues, market share
and profit over systemic risk management objectives".
The BoE will have powers to force clearing houses to take a
specific action, impose requirements and penalties and even to
revoke their licence to operate.
While clearing house ran into difficulties during the
2007-09 financial crisis, there are concerns that clearers
becoming bigger on derivatives will be new risk centres.
Thomas Huertas, when he was a senior regulator at Financial
Services Authority last year, said that unless carefully thought
through, centralising trillions of dollars of derivatives would
be like "putting a Chernobyl in the back yard".
The BoE said it will fully enforce European Union and new
global standards on supervising clearing houses, which will
require them to hold enough capital to withstand two of their
biggest customers going bust.
The London Stock Exchange is renegotiating its
purchase of a controlling stake in LCH.Clearnet, one of Europe's
biggest clearers which now faces a regulatory capital shortfall
of 300-375 million euros ($395-$494 million).
The BoE said clearing houses will have to show plans for
dealing with their own demise and how key services would
continue if they got into trouble.
Supervision will look for "strong user" representation and
independent directors at clearing houses, the BoE said.
It said clearing houses should not cut margin requirements
on contracts to win business. "A better solution for the system
is for margins to remain at higher levels in good times even if
this may be above the minimum level required by regulation."
Clearing houses will also have to satisfy themselves that
their members are managing their risks properly too.