Powell Calls for More Oversight of Derivatives Clearing

Federal Reserve Governor Jerome Powell called for more coordinated global regulation of derivatives clearinghouses to increase their liquidity, transparency and ability to withstand shocks without government bailouts.

“Given the increasingly prominent role that central clearing will play in the financial system going forward, it is critical that we collectively get central clearing right,” Powell said in the prepared text of an address he is scheduled to give today at a conference in Chicago.

After losses in over-the-counter derivatives helped push insurer American International Group Inc. to the brink of failure, Group of 20 regulators agreed in 2009 that standardized derivatives should be centrally cleared. While the move has brought more transparency to the market, it has also raised the risk posed by a potential failure of any large clearinghouse, Powell said.

To ensure clearinghouses “do not themselves become too-big-to-fail entities, we need transparent, actionable and effective plans for dealing with financial shocks that do not leave either an explicit or implicit role for the government,” he said.

Powell, a former partner at Washington-based private equity firm Carlyle Group LP, said global regulators should create coordinated, standardized stress tests for clearinghouses. More information from stress tests should also be made public, he said.

Clearinghouses should also be required to maintain sufficient liquidity to withstand shocks, he said.

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