Major Clearinghouses Can Avoid Liquidity Crunch in Crisis, CFTC Says

By Gabriel T. Rubin 

WASHINGTON -- Major clearinghouses for derivatives can withstand substantial stress to the financial system and avoid a liquidity crunch in a crisis, the Commodity Futures Trading Commission said Monday in a report that marks the second time it has "stress-tested" the entities and found they passed.

The CFTC's report came a day after National Economic Council Director Gary Cohn said he was worried about whether clearinghouses are being overused, adding that regulators don't have guidelines for resolving a clearinghouse "in an orderly fashion." Mr. Cohn's remarks Sunday at a Group of 30 banking seminar in Washington add to calls from U.S. policy makers to keep a close eye on clearinghouses.

The CFTC tested three of the largest U.S. clearinghouses -- CME Group Inc.'s CME Clearing, Intercontinental Exchange Inc.'s ICE Clear U.S. and LCH Clearnet Group Ltd.'s LCH Ltd. -- and found that each would be able to generate sufficient liquidity to keep markets functioning even if two of their major clearing member banks were to default.

Clearinghouses, mostly used by banks and investment firms, are meant to help avoid a marketwide collapse by making sure that either party in a derivatives transaction is paid if the other side falters. Their role has grown since the 2008 financial crisis as regulators encouraged derivatives to be routed through them.

Clearinghouses conduct their own tests to determine how they would function under extreme market conditions. While the CFTC tests examined what would happen if two major clearing members defaulted, some clearinghouses test what would happen if as many as four member banks failed simultaneously. Given the size of clearing member banks, such a situation would undoubtedly be in the midst of a major financial crisis.

The supersizing of certain clearinghouses after the financial crisis has gotten significant attention from U.S. policy makers in recent months. The House Agriculture Committee held a July hearing devoted to clearinghouse resolution, and Federal Reserve governor Jerome Powell has said repeatedly in public remarks that stress tests for clearinghouses must be more robust and reflective of the risk they pose to financial stability.

"Central clearing will only make the financial system safer if [clearinghouses] themselves are run safely," Mr. Powell, who is said to be a top candidate for Fed chairman, said in a June speech.

The Treasury Department has also taken an interest in stress tests for clearinghouses, saying in its report on capital markets earlier this month that regulators should build on existing tests to make sure clearinghouses have plans for winding down in an orderly fashion in the event of a major crisis.

Write to Gabriel T. Rubin at [e-mail]

(END) Dow Jones Newswires

October 16, 2017 00:15 ET (04:15 GMT)

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