CHICAGO LCH.Clearnet, the world's biggest clearer of interest-rate swaps, did not make an initial list of global clearinghouses labeled "systemically important" by a council of U.S. regulators earlier this week, three sources familiar with decision said.
LCH.Clearnet, a London-based firm set to be bought by the London Stock Exchange (LSE.L) at the end of the year, had earlier said it fully expected to get the label.
The label subjects clearers to tougher oversight but also potentially gives them access to valuable services, such as keeping funds at a Federal Reserve bank.
While firms such as insurers and hedge funds are eager to dodge the designation, many clearinghouses see it as a form of government endorsement that could appeal to customers.
Clearinghouses stand to get a windfall of business in the coming years as financial reforms force market players to route swap trades through clearinghouses.
CME Group Inc (CME.O), IntercontinentalExchange Inc's (ICE.N) ICE Clear Credit, and options clearinghouse OCC were among those clearinghouses that did receive the proposed designation on Tuesday, executives at the clearinghouses have said.
There is little question that LCH.Clearnet also is a giant.
LCH.Clearnet's SwapClear unit, which handles interest-rates swaps, cleared $1.7 trillion in notional value on Thursday alone. About a third of its cleared trades are in U.S. dollars.
By comparison, OCC, which did receive the "important" designation, cleared $3 trillion in notional value in all of 2011. OCC is the only clearinghouse for U.S. stock-options exchanges.
"Systemic risk knows no borders," said Michael Greenberger, a former futures regulator and now a professor at the University of Maryland. "If LCH were to default and collapse, we would feel it very much in the U.S. It would create a world economic problem."
Clearinghouses designated as systemically important will be overseen by the Fed, in addition to their current regulators.
Greenberger said he believed the council did not designate LCH because it was concerned the Fed could not adequately regulate a foreign-based financial institution.
"I think as a matter of international relations and perhaps legal extraterritoriality reasons, it could not have been done," he said. LCH is regulated by the UK-based Financial Services Authority. Its U.S. unit is also registered with the Commodity Futures Trading Commission.
A Treasury Department spokesman declined to comment about the decision on LCH, citing the final rule from the Financial Stability Oversight Council that reads, "Maintaining the confidentiality of the notices (of potential designation) and information requests is important to prevent potentially destabilizing market speculation that could occur if the Council were to make such notices public."
An LCH spokeswoman in London also declined to comment.
The council, created under the Dodd-Frank financial reform law, expects to make a final decision on the initial set of clearinghouse designations as early as this summer.
Those chosen as "systemically important" would gain access to the Fed Reserve's emergency lending facilities but would also be required to comply with tough new rules on capital, liquidity and how much exposure they can have to other firms.
The idea behind having some clearinghouses subject to greater regulatory scrutiny is that they must be more closely policed because their failure could roil financial markets.
(Reporting by Ann Saphir and Rachelle Younglai in Washington; Editing by Kenneth Barry)