Major Clearinghouses Can Avoid Liquidity Crunch in Crisis, CFTC Says
16 October 2017 - 3:30PM
Dow Jones News
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 gabriel.rubin@wsj.com
(END) Dow Jones Newswires
October 16, 2017 00:15 ET (04:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
CME (NASDAQ:CME)
Historical Stock Chart
From Jun 2024 to Jul 2024
CME (NASDAQ:CME)
Historical Stock Chart
From Jul 2023 to Jul 2024