Regulation

Investment Banks Want Better Standards For Clearing Houses

Asset managers like BlackRock and Vanguard, along with investment banks, have banded together to ask clearing houses to create larger safety buffers and more stringent standards to help stave off potential future trading losses.

The Financial Times is reporting that a group of nine banks and fund managers are asking the biggest clearing houses in the world to put more money into their fallback funds and shore up recovery plans.

Clearing houses like LCH and ICE Futures US have historically been seen as good examples of market stability, especially in the last decade. They act as buffers between trading partners and help to mitigate the damage if there is a default on either side.

However, because of their important positions in the market, there is now talk that they are becoming “too important to fail.” There are also no standards yet in the EU or the U.S. to cover what would happen in the event of a financial issue.

A default by a clearing house would either fall on shareholders or members, or even customers of members. However, politicians say a taxpayer bailout would not be one of the options.

The group issued a whitepaper on the subject on Thursday (Oct. 24). The paper points out that the biggest clearing houses are owned by the London Stock Exchange Group, CME Group, Intercontinental Exchange and Deutsche Börse, which are all publicly listed.

This fact creates a conflict of interest, according to the paper, because the clearing houses want to give their shareholders the most profits. “Regulatory action on this front is needed,” the paper said.

The paper asks that clearing houses put more of their own money aside and boost their deposits into their own default funds, which would be utilized if all contributor shares were depleted. It also suggests more stringent capital requirements, which would be part of pre-settled recovery plans.

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