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16 January 2012

Reuters: Clearing houses - the next casualty of the crisis?


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Clearing houses could become the next casualty of the crisis as regulators insist that banks run their riskiest and private trades through them.


At the moment, banks conduct over-the-counter trades between themselves: one to one dealings often involving multimillion-euro bets on differences in interest or other rates, the scale and complexity of which can be difficult to track. But with the financial crisis still raging, and banks, hedge funds and governments alike faced with unforeseen levels of debt, regulators are now forcing this shadowy, $600-trillion industry into the light.

The question being asked by industry insiders is whether the clearing houses, also known as central counterparties (CCPs), are any more secure. Clearing houses, such as LCH.Clearnet, Deutsche Börse's (DB1Gn.DE) Eurex Clearing and the Chicago Mercantile Exchange's (CME.O) CME Clearing, sit between the parties at either end of a trade.

In taking on over-the-counter (OTC) products, the concern is that the clearing houses will not have sufficient collateral to cover the scale of possible future positions. The Dodd-Frank Bill in the United States and Europe's MiFID II and EMIR acts will force firms trading standardised products, such as the most common swaps, to use clearing houses when they take effect, perhaps as early as this year.

But forcing these trades into clearing houses does not in itself address the risk of a trading firm default. "The truth is, the possibility of a clearing house going into default has only really been considered recently", said Chris Jones, executive director and head of risk management at LCH.Clearnet.

Full article



© Reuters


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