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Clearinghouses Too Risky, Say Global Finance Officials

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The International Organization of Securities Commissions and the Bank for International Settlements' Committee on Payments and Market Infrastructure (CPMI) released joint reports this week that conclude clearinghouses throughout the globe are inadequately managing risk.

Reports by The Wall Street Journal on Tuesday (Aug. 16) summarized the reports by the regulators, which found that several clearinghouses surveyed fall short in their risk mitigation and recovery plans.

The reports were released weeks before finance ministers and officials from central banks plan to meet in China, where they will discuss a number of issues, including clearinghouses. They have become a top focus for financial regulators, reports explained, following the financial crisis, with efforts made to ensure that proper payment is received between a derivatives transaction should one side fail.

The collapse of Lehman Brothers largely brought that risk into light, reports added. Financial authorities are still working out how to safeguard this process in case of bank failures.

Earlier this year, reports by Financial Times said banks are exposed to $27 billion in annual losses because of failed over-the-counter derivatives payments, according to a survey by PwC and DTCC-Euroclear Global Collateral.

"Ensuring that central counterparties are safe and resilient is an important priority for the G20," said Benoît Cœuré, chairman of the Bank for International Settlements' CPMI. "These reports deliver on key goals set by the Chinese presidency."

The financial heads from the G20 that will meet next month in China will reportedly discuss the process of establishing standards and safeguards for clearinghouses, also know as central counterparties (CCPs). The Financial Stability Board (FSB), as well as the Basel Committee on Banking Supervision, are also working with IOSCO and the CPMI, according to reports. The FSB also said on Tuesday that it is seeking public comment on the initiative.

"CCPs form a central part of the post-crisis reforms of over-the-counter derivatives markets to help reduce risk in the financial system," said Elke Koenig, chair of the FSB's Resolution Steering Group and the European Single Resolution Board. "But we must also ensure that CCPs are themselves robust, and this includes appropriate resolution regimes."

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