Clearinghouse Members Get EU Capital Reprieve in Rules Overhaul

The European Union’s top market regulator overhauled rules for derivatives trading and clearinghouses, including a reduction in the amount of capital that members of central counterparties have to put at risk.

Members of clearinghouses, which act as central counterparties in derivatives contracts to spread the risk of default, will have to contribute a quarter of the institution’s capital reserves, the European Securities and Markets Authority said. The agency reduced the amount from 50 percent as this “might lead to a situation where CCPs are encouraged to hold as little capital as possible,” ESMA said.

The proposals are part of a global overhaul of rules governing derivatives contracts, mandating the use of central counterparties by derivatives traders. 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.

“The new regulatory framework reduces the risks arising from over-the-counter derivatives trading by improving transparency in the sector and ensuring resilient central counterparties,” Steven Maijoor, chairman of Paris-based ESMA, said in an e-mailed statement.

ESMA also clarified the types of assets that should be accepted as eligible collateral. The agency allowed shares in the underlying security of the traded derivative to be accepted as collateral, along with gold and bank guarantees. Securities that reference real estate assets will not be accepted.

Crisis Management

Global regulators have identified clearinghouses as too-big-to-fail financial institutions, and are in the process of writing rules requiring losses to be imposed on creditors rather than tax-payers in the event of a crisis.

Losses on so-called variation margin and conversion of creditor claims into equity are among options proposed by a group of regulators in July to protect taxpayers from future financial catastrophes when other buffers are depleted.

The losses “should be no worse than they would be in insolvency” if the clearinghouse’s creditor hierarchies are respected in writedowns, according to the proposals published by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions on July 31.

Another regulator, the European Banking Authority, proposed yesterday that clearinghouses hold enough capital to cover credit risk from their activities, as well as to cover operational expenses during a wind-down.

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