LONDON, Sept 25 (Reuters) - European Union governments could nationalise a failed clearing house to safeguard stability in the financial system, an EU document outlined on Friday.
The EU’s executive European Commission is due to publish a draft law on handling collapsing clearing houses.
Clearing houses are third parties that stand between two sides of a stock or derivatives trade. Regulators are requiring swathes of the $630 trillion derivatives market to be cleared to improve safety and transparency.
Also known as central counterparties or CCPs, they are set to swell in size, prompting fears they could become the next set of “too big to fail” financial institutions unless there are clear rules on what to do if they get into trouble.
But in a discussion paper for EU states, the European Commission sets out an option that governments have all but scrapped for banks after public anger over lenders being shored up by taxpayers during the financial crisis.
It says that “as a last resort” a government could provide public support to avoid the financial system crashing.
“Ministers could inject capital and buy a temporary ownership stake in the CCP, or take the CCP as a whole into public ownership,” the document seen by Reuters said.
“In both cases, they should ensure that the CCPs are managed on a commercial and professional basis and that they are transferred to the private sector as soon as commercial and financial circumstances allow,” it added.
Under the draft law, clearing houses such as LCH.Clearnet , Eurex Clearing and ICE Clear Europe would have to draw up plans, vetted by regulators, showing how they would overcome “any form of financial distress”.
The plans should not rely on any extraordinary public financial assistance, but should outline how possible access to central bank facilities under standard terms could be obtained.
The Bank of England and European Central Bank have agreed to provide currency swaps in the event of an emergency at a clearing house such is their concern about the sector’s growing role.
Asset managers have lobbied to stop the cash they post at a clearing house from being used to plug any financial hole.
The paper gives options, including not using client margin, echoing a similar move by global regulators who want flexibility on which “tools” to use when shoring up a clearer.
Unlike in other EU financial rules, there is no mention of requiring a non-EU clearer to be regulated as strictly as those in the EU in order to operate in the 28-country bloc. (Reporting by Huw Jones; editing by Susan Thomas)