Participants in the derivatives industry said that regulators need to complete the rules on how to undo a swaps clearinghouse if the procedure fails, said participants at an April 6 conference.
“Its very important that sooner rather than later regulators make sure we get these things written down so they’re respected,” said John Williams in Bloomberg News. Williams is a partner in the derivatives and structured product finance group at Allen & Overy LLP. He called a default by a clearinghouse “the worst worst scenario” and called for more research on how to address the event.
Clearinghouses process most swaps in the OTC derivatives market. The Financial Stability Oversight Council will specify which clearinghouses will face increased oversight and reporting requirements. It has not yet announced its designees. Under the Dodd-Frank Act, the Federal government will bail out a clearinghouse if it is determined to be important to the financial system; regulators may also take over a clearinghouse in the event that it is not bailed out.
Speakers at the conference debated over the treatment of derivatives trades when a counterparty defaults. Swaps and futures trades don’t face a stay in activity if the bank that owns the trades defaults.
“We really do need to be thinking of the implications of financial failure in this area,” said David Skeel, a professor of corporate law at the University of Pennsylvania Law School.