Bloomberg News

FSA Proposes Tougher Liquidity Rules for Clearinghouses

October 05, 2011

(Updates with analyst comment in seventh paragraph.)

Oct. 5 (Bloomberg) -- The U.K. Financial Services Authority proposed tougher capital and liquidity rules for clearinghouses the day after a European Union agreement on measures to force more derivative trades through central counterparties.

Clearinghouses should have a liquidity buffer as part of their capital reserves to meet sudden short-term needs for cash, the FSA said in a report on its website today. Central counterparties, which backstop derivative trades between two parties, should also carry out stress tests to determine how much capital they would need to hold in times of crisis.

“We will consider whether a stress-testing plan provides for an appropriate range of adverse scenarios that adequately reflects the recognized body’s exposure to financial shocks, given its over-arching risk profile,” the FSA said.

EU finance ministers reached an agreement yesterday on rules to improve transparency in trading of over-the-counter derivatives. The Financial Stability Board has said clearinghouses should in turn face tougher regulations because a crisis at one of them could threaten the global financial system. The final version of the EU law will need to be completed in negotiations with the European Parliament.

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

Systemic Risk

Yesterday’s deal would cover a broad swath of over-the- counter derivatives, which the EU estimates includes 90 percent of all derivatives trades. Derivatives that don’t meet that definition -- and which aren’t covered by specific exemptions -- will face a central clearing requirement in future legislation.

“It’s clear that the potential systemic risk due to concentration through central counterparties and clearinghouses is of concern to regulators,” James Babicz, head of risk at business analytics firm SAS U.K., said in an e-mailed statement. “What is unclear is how this will be adequately addressed.”

The increasingly important role central counterparties have to play in the global financial system means that “it is appropriate that the financial standards recognized bodies have to meet should be set conservatively,” the FSA said in the report.

--Editors: Christopher Scinta, Peter Chapman

To contact the reporters on this story: Ben Moshinsky in London at

To contact the editor responsible for this story: Anthony Aarons at

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