Clearing houses are big risk, top U.S. federal researcher says

WASHINGTON (Reuters) - Clearing houses, whose role to guard financial stability was much expanded after the 2007-09 crisis, now pose threats themselves, the head of the top U.S. financial research agency told Reuters on Friday.

Office of Financial Research Director Richard Berner answers a question during the Reuters Financial Regulation Summit in Washington, May 15, 2015. REUTERS/Carlos Barria

The Office of Financial Research has looked at these firms, which are for instance run by CME Group Inc. CME.O, Deutsche Boerse's DB1Gn.DE Eurex, and Intercontinental Exchange Inc ICE.N, to see where risk is building up.

“They are very much on the (priority) list,” agency director Richard Berner told the Reuters Financial Regulation Summit. “There have been lots of discussions and I think there will continue to be lots of discussions about risk and (clearing houses) and I think that’s totally appropriate.”

There have been increasing concerns that clearing houses, which stand between buyers and sellers of securities and derivatives, could be the financial system’s next weak spot and cause mayhem if one of them landed in trouble.

Berner is a non-voting member of the Financial Stability Oversight Council (FSOC), a group of the heads of the main U.S. financial regulators. His agency has powerful research capabilities to provide the FSOC with better data.

Before the crisis, Wall Street banks in the $630 trillion swaps market largely traded directly with each other, mostly over the telephone. But such trades are now more and more routed through clearing houses, to make them less opaque.

“There are several advantages to (clearing houses) but it’s important to know ... that using (clearing houses) doesn’t reduce risk; indeed it concentrates risk,” Berner said.

Another problem is that regulators often still cannot make sense of the deluge of data they are now getting after new rules to promote transparency were introduced.

For instance, the OFR is developing new data standards with the Commodity Futures Trading Commission, which regulates derivative markets. But that takes a lot of time.

“They are in development. The hope is that these can be developed in the space of a couple of years at the most. Sooner would be better,” Berner said.

The OFR was the author of a report on risks in the asset management industry in 2013 that the industry feared could lead to designation of firms by the FSOC as systemically important companies that are subject to tougher oversight.

Asset managers have so far escaped the much-feared tag, but three large insurers have not. Reinsurers were another group worthy of regulators’ attention, Berner said.

The Office of Financial Research is an agency within the U.S. Treasury Department created by the Dodd-Frank reform act to promote financial stability by looking across the financial system to measure and analyze risks, among other things.

(This story has been corrected in first paragraph to say ... much expanded ..., instead of ‘much praised’)

Reporting by Douwe Miedema; Editing by Steve Orlofsky