U.S. Markets

Gary Cohn warns on 'major risk' evolving in clearing houses: Bloomberg

White House chief economic adviser Gary Cohn speaks during a press briefing at the White House in Washington, U.S., September 28, 2017. REUTERS/Yuri Gripas

NEW YORK (Reuters) - National Economic Council director Gary Cohn said on Sunday he sees a “major risk” evolving in clearing houses, according to a Bloomberg report.

As “we get less transparency, we get less liquid assets in the clearinghouse, it does start to resonate to me to be a new systemic problem in the system,” Cohn said, speaking at a banking conference in Washington, according to Bloomberg.

Looking at future financial risks, “this is where we should spend some time,” Cohn said. Cohn could not immediately be reached for comment.

Clearing agencies act as a middlemen between parties to securities transactions by ensuring the smooth transfer of funds and securities, and in some cases, serve as a backstop in case a brokerage defaults.

“Like every great modern invention, it has its limits, and I think we have expanded the limits of clearing probably farther beyond their useful existence,” the report quoted him as saying.

Cohn’s remarks follow a Treasury Department report earlier this month that called for greater regulation of clearing houses, given the centralization of risk in a clearinghouse and resulting implications for systemic risk.

As the Trump administration decides whether to reappoint or replace Federal Reserve chair Janet Yellen, whose term expires in early February, Cohn has been cited as a potential candidate.

Last year, the U.S. Securities and Exchange Commission said it would adopt rules to strengthen the regulatory framework for clearing agencies deemed systematically important or that are involved in complex transactions, such as security-based swaps.

Reporting by Saqib Iqbal Ahmed; Editing by Cynthia Osterman