Clearinghouses Should Bear Losses on Member Default, ESMA Says
Derivative clearinghouses should use their own capital to cover losses when members can’t meet their obligations to prevent “a default waterfall,” Europe’s top markets regulator said today.
About 50 percent of central counterparties’ capital should be earmarked to cover losses before non-defaulting members need to step in to prevent a collapse, the European Securities and Markets Authority said in a report today. The regulator also proposed measures such as tougher collateral requirements and increased trade reporting.
The proposals are part of an overhaul of rules governing derivatives contracts in Europe that are scheduled to be implemented by the end of the year. Global regulators have sought tougher rules for over-the-counter derivatives since the collapse in 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.
Over-the-counter derivatives affect “both financial markets and the real economy, but have not been subject to regulatory requirements,” Steven Maijoor, ESMA chairman, said in an e-mailed statement. “This absence has resulted in negative consequences for financial markets, investors and the real economy.”
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