Global banks, funds call for more capital from derivatives clearing houses

NEWYORK (Reuters) – Four global banks and five big fund managers called on international regulators on Thursday to require for-profit derivatives clearinghouses to put up more of their own capital to protect against cascading losses that could rock the world financial system.

Members of the group, including Citigroup Inc, <C.N> JPMorgan Chase & Co <JPM.N> and BlackRock Inc <BLK.N>, published their views to try to shift in their favour prolonged policy debates over how clearinghouses should be fortified.

Regulators put clearinghouses at the centre of trading in over-the-counter credit derivatives and interest rate swaps after the 2008 financial crisis. But the regulators have yet to agree on detailed protocols for shoring up, or safely winding down, clearinghouses wounded by customer defaults.

The task is arguably the biggest unfinished post-crisis reform and has become important as large clearing houses have become, like banks, too big to fail.

"We believe current capital requirements are insufficient," the group said in the white paper.

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The clearinghouses, known as central counterparties, stand between both sides of trades and ensure their completion even if one side goes bust.

The clearinghouses were embraced after the failure of Lehman Brothers in 2008 left a mess of unknown losses amid criss-crossed trades booked directly between each side.

Since then, clearing has become concentrated in a few clearinghouses primarily owned by the London Stock Exchange Group plc, <LSE.L> International Exchange Inc <ICE.N> and CME Group Inc <CME.O>. Most of the trades cleared through them come from about 10 big banks, known as clearing members and used by fund managers to take positions.

The banks and fund managers contend that the clearinghouses do not have enough of their own money at risk, leaving them with too little incentive to ensure effective risk management against defaults, operational failures and cyberattacks.

They also call for changes in governance rules to give clearing members more say in risks the clearinghouses may take on, such as clearing new instruments with unknown volatility.

Clearinghouses, in past comments to regulators and white papers of their own, have said that the banks should have a major responsibility for losses to prevent them from taking too much risk with trades and clients.

Clearinghouses were traditionally owned by their users. As investor-owned companies, they and their users have come in more conflict.

The banks are under increased pressure from regulations to limit how much capital they have at risk. Some of those rules have prompted some banks to back away from derivatives, which is a concern to fund managers who use them.