Monday 16 November 2020 10:27 am

Regulators urge more clearing scrutiny but push back buffer decision

Global regulators have recommended increased scrutiny on clearing houses but have held back from saying the key financial institutions should themselves take on more of the burden of potential losses.

The Financial Stability Board (FSB), which coordinates rules for the G20 group of rich countries, said it would “consider during the course of 2021” whether clearing houses should have “pre-funded resources” as buffers.

Read more: Frankfurt boosts euro clearing incentives for banks, escalating battle with London

Clearing houses oversee the settlement of financial deals. They are vital to ensuring the correct payments reach the right parties, even if a counterparty goes bust.

Since the financial crisis, regulators have encouraged firms to use clearing houses to safeguard deals. They include London’s LCH and CME’s Clearing.

The FSB said today that the coronavirus crisis had “demonstrated the benefits that central clearing brings for global financial stability”. 

Yet it said that the increased importance of clearing houses increased the need for regulation.

To this end, the international organisation laid out new rules to help national regulators assess the adequacy of the resources currently in place for clearing house resolutions.

For example, although clearing houses are already required to have sizeable default funds, the new rules set out how they should be replenished after covering losses.

FSB kicks pushes back clearing fund decision

However, the FSB’s report did not address calls by banks and investors that the houses take on more of the burden themselves.

Key players worry that they could be on the hook for too much of the burden if clearing houses fail. Big names such as Blackrock and Citigroup have said the clearing houses should pay more into default funds. 

Read more: Bank of England and US regulators renew deal on clearing cooperation

The FSB today said it would look into this issue further next year. It said it will develop policy “on the use, composition and amount of financial resources in recovery and resolution”.

“This would include assessing whether any new types of pre-funded resources would be necessary to enhance CCP resolvability.”