BRUSSELS (MNI) – European central bankers on Monday warned of the
risk that a failed clearing house could pose to financial stability and
called on the European Commission to bring forward plans for legislation
to ensure such trade processing facilities could be orderly handled in
the event of a default.

International rules to ensure the orderly resolution of failed
clearing houses are needed to avoid the “mayhem” that would ensue should
such a trade processing facility go bust, the Deputy Governor of the
Bank of England said Monday.

“Resolution and default mechanisms are a big gap in the
international regulatory architecture,” Paul Tucker said at a conference
on post-trade infrastructure, hosted by the European Commission.

ECB Executive Board member, Peter Praet, speaking at the same event
agreed: “the issue is not yet sufficiently high on the agenda,” he said.

“We want to push the European Commission and other stakeholders to
bring forward a resolution framework for CCPs,” he said.

“If a CCP goes bust, you get Mayhem,” said Tucker, who helped clear
up the collapse of the Hong Kong Futures Exchange in 1987.

“Resolution requires laws to ensure that an administrative part of
the executive branch of government can step in and take hold of the
failing financial institution rather than the normal insolvency
process,” Tucker said.

“Most well-articulated resolution regimes apply to banks and only
to banks,” however, he said. “The really urgent thing is to change the
scope of resolution regimes.”

“The big question in any debate about resolution is where do the
losses go,” said Tucker. A normal liquidation process would be dangerous
for central counterparties because it leads to a rapid sale of assets,
he explained.

Praet said that resolution rules for CCPs should also consider the
interaction that could occur between a central counterparty and a failed
large broker dealer.

EU lawmakers are working on legislation to drive off-exchange
derivatives trades onto clearing houses to reduce the potential impact
that the collapse of a major trader could have on the wider market, an
initiative that G20 leader agreed to priorities following the fall of
Lehman Brothers.

According to IMF estimates the 10-15 banks that dominate the
over-the-counter trading in derivatives are under-collateralised by as
much as $2trillion.

Brussels newsroom: +32495228374; pkoh@marketnews.com

[TOPICS: M$$BE$,M$$EC$]