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Clearinghouses Face BOE Spot Checks on Risk-Management Practices

Clearinghouses face unannounced reviews into how they manage risks when the Bank of England takes over as financial supervisor next year.

Clearinghouses, which act as central counterparties in derivatives transactions, will also have to show that bonuses for senior management don’t prioritize “revenues, market share and profit over systemic risk-management objectives,” the central bank said in a report on its website.

The paper precedes a meeting at the central bank today where officials including Paul Tucker, deputy governor for financial stability, and Andrew Haldane, executive director for financial stability, will inform the industry about supervision. It said central counterparties will need to show that risk-management functions are “adequately resourced, sufficiently independent from commercial pressures and have a key role in the decision-making process.”

The Bank of England will take responsibility for supervising central counterparties and securities settlement systems once the U.K. Financial Services Bill takes effect, expected on April 1. European Union and U.S. regulators are trying to align rules for the $648 trillion market for over-the-counter derivatives, which became a target for tougher oversight after the 2008 collapse of Lehman Brothers Holdings Inc.

The central bank also said that traders should post high margins to clearinghouses even during periods of low financial stress to make the system more resilient against sudden changes in trading conditions.

There may be incentives for central counterparties to “allow margin requirements to fall to low levels when prices are relatively stable in order to reduce collateral costs for participants and thereby to win business,” the bank said.

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