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Fed's Evans Says Central Clearinghouses for Derivatives Carry Failure Risk
Federal Reserve Bank of Chicago President Charles Evans said that central clearinghouses for derivative trading could become failure risks.
“The centralization of clearing functions at the clearinghouse has obvious benefits,” Evans said today in a speech at a Fed conference in Chicago. “However, policy makers also recognize that central clearing concentrates risk and responsibility for risk management.”
“This means the clearinghouse itself becomes a potential single point of failure,” Evans said at the public policy symposium on over-the-counter derivatives clearing. “Adequate capital, good risk management and prudential oversight are essential for such clearing facilities,” he said.
Among changes in the derivatives market signed into law last month by President Barack Obama are requirements that standardized interest-rate, credit-default and other swaps be processed by clearinghouses and traded on exchanges or similar systems.
New designations must be defined as well, such as which swaps will be required to be processed by a clearinghouse and which firms are “major swap participants.”
Evans, 52, joined the Chicago Fed as an economist in 1991 and became president in September 2007. He votes every other year on the interest-rate setting Federal Open Market Committee. He next votes in January 2011.
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
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