Bloomberg News

Regulators Designate Swaps Clearinghouses Systemic

May 22, 2012

A panel of U.S. regulators voted to designate swaps clearinghouses as systemically important, a step that would put them under heightened supervision.

The Financial Stability Oversight Council approved the designation of an initial set of so-called financial-market utilities as systemically important. The utilities, which weren’t named, may contest the designation. The council expects to make final designations “as early as this summer,” according to a statement issued by the U.S. Treasury Department.

Clearinghouses are required to process most swaps in the $708 trillion over-the-counter derivatives market under provisions of the 2010 Dodd-Frank Act. The designation will be the FSOC’s first delineation of which companies aside from banks would threaten the financial system in the event of a failure.

CME Group Inc. (CME:US), the world’s largest futures exchange, said last year it will have its clearinghouse designated. The Chicago-based company guarantees interest-rate and credit- default swaps. The designation of so-called financial-market utilities is taking place under the Dodd-Frank Act overhauling financial regulation and will entail tougher examination and reporting requirements.

Atlanta-based Intercontinental Exchange Inc. owns the world’s largest credit-default swaps clearinghouse, and London- based LCH.Clearnet Group Ltd., is owner of the biggest interest- rate swap clearinghouse.

Secretary Geithner

The panel of regulators also is in the process of determining which non-bank financial companies are systemic. Treasury Secretary Timothy F. Geithner, the panel’s chairman, has said it would make that designation by the end of the year. U.S. bank holding companies with assets of $50 billion or more are automatically deemed systemically important.

The Dodd-Frank act aims to reduce risk and boost transparency in the swaps market after largely unregulated trades contributed to the 2008 credit crisis. Clearinghouses, which are capitalized by their members, guarantee trades by standing between buyers and sellers.

Under Dodd-Frank, the designated utilities could be subject to Federal Reserve supervision and may be required to open an account at a Federal Reserve bank, develop a risk-management framework and procedures and resources for a possible default. The Fed also may provide access to its discount window in “unusual and exigent” circumstances.

2008 Crisis

Credit-default swaps were closely tied to the 2008 financial crisis. Insurer American International Group Inc. (AIG:US) collected fees by selling banks and other investors credit- default swaps that would pay out if their mortgage securities defaulted. When the housing market collapsed, AIG was unable to meet its promises, and the U.S. government stepped in to honor the contracts.

FSOC also received a preliminary briefing on the $2 billion trading loss at JPMorgan Chase & Co. (JPM:US) The Treasury statement said “regulators are still in the process of conducting their evaluation of what happened and why.”

“That examination is an important input into the ongoing effort to design safeguards and reforms, including those in the Volcker Rule, so that mistakes in judgment at individual banks are less likely to threaten the broader financial system and economy. FSOC members will remain focused on these issues and return to them and others at their next scheduled meeting of the Council in June,” according to the statement issued by the U.S. Treasury.

To contact the reporters on this story: Ian Katz in Washington at; Cheyenne Hopkins at

To contact the editor responsible for this story: Christopher Wellisz at

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Companies Mentioned

  • CME
    (CME Group Inc/IL)
    • $92.91 USD
    • 0.55
    • 0.59%
  • AIG
    (American International Group Inc)
    • $56.13 USD
    • 0.35
    • 0.62%
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