Swaps Clearinghouses Need Greater Oversight, CFTC’s Wetjen Says

Clearinghouses meant to reduce swaps market risk must face greater oversight to ensure they don’t threaten the financial system, according to a member of the U.S. Commodity Futures Trading Commission.

Regulators should weigh having clearinghouses put up more of their own capital in the event of a default and requiring them to undergo standardized stress tests, Commissioner Mark P. Wetjen said in remarks prepared for a Futures Industry Association conference in Singapore today.

After the 2008 credit crisis highlighted the threat posed by financial companies’ exposure to swaps, regulators including the CFTC moved to require that most trades be guaranteed at clearinghouses including those owned by LCH.Clearnet Group Ltd., CME Group Inc. and Intercontinental Exchange Inc.

“As clearing volumes increase, however, we need to be cognizant of, and effectively address, the resulting increased concentration of risk,” Wetjen said.

Today’s comments show Wetjen aligned with a growing number of regulators and traders encouraging heightened scrutiny of clearinghouses. CFTC Chairman Timothy Massad, Federal Reserve Governor Jerome Powell and executives at JPMorgan Chase & Co., the largest U.S. holder of swaps, have urged more oversight as clearinghouses play a bigger role in the market.

Regulators should consider publishing a release on possible standard stress tests, said Wetjen, a Democrat. The CFTC should also consider rules for how much of its own capital a clearinghouse should contribute in a default, he said.

Wetjen said he will hold a CFTC advisory committee meeting to discuss additional oversight.

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