Two European central bankers have expressed anxiety at the lack of orderly-default plans in the regulatory regime proposed under MiFID II. The Bank of England’s Paul Tucker and the European Central Bank’s Peter Praet were both on message at conference on the future of clearing regulation in Brussels. They both worry that European Commission regulators have not made clearinghouse risk-management a priority as they race towards the G-20 2012 deadline for derivatives reform.
Tucker, a BOE Deputy Governor, did not shy away from the implications of a clearinghouse collapse: “There is a big gap in the regimes for CCPs (central counterparties). What happens if they go bust? I can tell you the simple answer: mayhem. As bad as, conceivably worse than, the failure of large and complex banks…The issue, always, is where do the losses go? The answer cannot be the taxpayer.”
Praet was adamant that regulators have not been taking the issue seriously. “It is a key issue which has not yet been put sufficiently high on the agenda,” he told reporters. Of the conference, he said “I think the purpose here was also to push a little bit the Commission and the other stakeholders to accelerate the work that is being done.” But the ECB Executive Board member is optimistic: “The Commission now says that by the end of next year there will be a resolution framework for CCPs which I think is very good news. In between I think there is a lot of work.”
In the United States, where derivatives reform is moving at a fast clip, the CFTC just passed a final rule governing Derivatives Clearing Organizations. In addition to controversial accessibility rules, the Commission included two provisions regarding the possibility of default. The first, part of the financial requirement section, mandates that clearinghouses have sufficient financial resources to stay afloat in the event of the default of their largest clearing member, or other “extreme but plausible” market situation. The second provision devotes an entire section to procedures to handle a clearing member default. The CFTC may also issue separate rules for systemically important DCOs requiring them to handle the default of their two largest members.