No consensus over stopping clearers becoming 'too big to fail'
By Huw Jones
LONDON (Reuters) - Banks and mutual funds have no way of comparing the health of clearing houses for derivatives just months before their use becomes mandatory in Europe, an industry conference heard on Tuesday.
The financial crisis prompted reform of the $630 trillion derivatives market, forcing many contracts in the United States to pass through a clearing house, with the European Union following suit next year with similar rules.
This involves a trade passing through a third party to ensure completion, even if one side goes bust, like Lehman Brothers bank did at the height of the financial crisis in September 2008. New York and London are the main centres for derivatives trading.
Divisions over how clearers should publicly demonstrate their ability to withstand market shocks were underscroed by officials speaking at an International Swaps and Derivatives Association (ISDA) conference in London on Tuesday.
The idea of a transparent, standardised "stress test" is "extremely attractive" for deciding which clearing house to use or avoid, said Stuart Anderson, director of electronic trading at BlackRock, the world's biggest asset manager.
Bill Stenning, managing director of clearing at French bank SocGen said it was "remarkably hard" to compare clearers, but he cautioned against a "strait-jacket" approach.
Clearers themselves are divided over how best to reassure users.
"We think a standardised stress framework... really goes one step to allowing the market to understand better this topic of resilience, and where the clearing house starts to hit problems," said Martin Pluves, chief executive of LCH.Clearnet Ltd, one of the world's largest clearers
However, Sunil Cutinho, president of CME Clearing, said risks were always changing and a "static" common test cannot reflect this.
"To end up with standardised stress tests is actually quite dangerous," Cutinho added.
This lack of consensus is partly why the EU's executive European Commission is taking longer than expected to propose rules on what to do when a clearing house gets into trouble.
Bank of England Governor Mark Carney has said reforms are needed to avoid clearing houses becoming "too big to fail", meaning taxpayers would have to rescue them if in trouble.
Stenning wants clearers to "stay awake at night" thinking about how to keep customers' money safe, Top management should face curbs that have already been imposed on bankers, such as deferring bonus payments over several years.
"You want to hold management's feet to the fire," Stenning said.
Separately on Tuesday, global regulators published their timeline for checking if big clearers are sturdy enough but the work won't be completed until well into 2016, after market users have had to decide which clearing house to use.
(Editing by Keith Weir)
