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24 October 2019

Financial Times: Banks are right to say that clearing houses are ripe for reform

Big banks do not usually gang up to demand more financial regulation, least of all with asset managers in tow. But this week some Wall Street banks are doing precisely that — albeit not in relation to their own operations, but to the clearing platform where they settle trades.

Nine financial giants — Allianz, BlackRock, Citi, Goldman Sachs, Société Générale, JPMorgan, State Street, T Rowe Price and Vanguard — release a joint statement calling for the reform of central counterparty clearing groups (CCPs).

They want regulators to impose better default buffers, disclosure and corporate governance on these clearing houses, whose ranks are dominated by the Chicago Mercantile Exchange, London Clearing House, Eurex and Intercontinental Exchange.

“Although regulators have made progress in enhancing a minimum level of CCPs’ pre-funded resources and setting risk management standards [to protect against default], several gaps in CCP resilience remain,” they warn. They note that it is “imperative that regulators take steps to address [a] misalignment of incentives”. Or, in plain English, the banks and asset managers fear that clearing houses pose systemic risks — and nobody is paying attention.

Are they right? Unsurprisingly, officials argue not and point out that they have already improved their risk management procedures in recent years to cope with foreseeable shocks. LCH, for example, collects a buffer of funds from its members that supposedly could absorb the default of its two biggest financial players.

CCP officials also argue that it is unfair to impose tougher regulatory standards since clearing houses (unlike banks or asset managers) are not in the business of taking proprietary risks. Indeed, they view the statement as just an attempt by brokers and banks to offload the cost of sensible risk management processes.

There may be a grain of truth in this: self-interest is certainly a factor here, but regulators need to heed the call nevertheless. So do investors. For the letter is entirely correct to point out that the current status quo around clearing houses is worrying. The nine financial groups are even more justified in feeling frustrated that regulators have hitherto done so little to change it.

Full article on Financial Times (subscription required)

Joint statement

© Financial Times

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