EU Plan for Failed Clearinghouses Shouldn’t Sink Banks, EBA Says

European Union plans for handling failing clearinghouses should be designed in a way that won’t cripple banks, the bloc’s regulators said today.

Some options being weighed by the EU for allocating losses at a crisis-hit clearinghouse “could spread the problems” to healthy financial institutions, according to an opinion published by the European Banking Authority. “In a situation of stress, banks could be seriously hit.”

The European Commission is seeking views until Dec. 28 on measures to take taxpayers off the hook for rescuing institutions such as clearinghouses, central securities depositories and large insurance companies. Steps being considered include forced writedowns of margin that lenders have posted with central clearers.

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s (DB1) Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post margin, reducing the threat from a trader’s default.

The EU should also weigh rules for failing hedge funds, the EBA said. The EBA brings together bank regulators in the 27- nation EU to coordinate rulemaking.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net