Banks' Capital Worries Eased by Deutsche Boerse Clearing Plan

  • Insurers, pension funds to get direct access to clearinghouse
  • Clearing is a key factor in Deutsche Boerse's takeover of LSE

Deutsche Boerse AG has found a new way for the world’s largest banks to minimize the impact of capital requirements put in place after the financial crisis.

The exchange operator’s Eurex unit will let big European investors, such as insurers and pension funds, have a direct relationship with its clearinghouse from this summer, the Frankfurt-based company said in a statement on Wednesday. The banks’ holding of client collateral has become contentious because new regulations treat it as a risk asset, and such assets are limited by a capital ratio.

As a result of Deutsche Boerse’s plan, banks can reduce the amount of capital they need to support their clients’ trades. Clearing firms hold collateral from buyers and sellers in case a member defaults. By halting the consequences of a default at the clearinghouse, the wider financial system should be spared.

The German company’s direct-clearing service shows how the industry is responding to the post-crisis rules that have transformed the derivatives market. The regulations heightened the importance of the clearinghouses that stand between counterparties, and clearing is also a key component in Deutsche Boerse’s planned acquisition of London Stock Exchange Group Plc. The companies hold some $170 billion in collateral from their customers.

Another challenge facing the industry is a decline in the number of clearing members, Deutsche Boerse said. Fewer members increases the concentration of risk at clearinghouses and limits choice for investment firms. Eurex’s direct clearing could help address those worries.

Regulations put in place after 2008 seek to increase the amount of capital banks must maintain to absorb potential losses on their assets. One rule in particular, the leverage ratio, could lead banks to need billions of dollars in collateral to support derivatives they have with their clients that are then guaranteed at clearinghouses.

The Basel Committee on Banking Supervision will propose an adjustment to the leverage ratio this year, according to a person with knowledge of the matter. The committee is comprised of regulators including the Bank of England and the Federal Reserve.

Bank lobbyists and executives from CME Group Inc., Intercontinental Exchange Inc. and LCH.Clearnet Group Ltd. have opposed the regulation, saying that client collateral already reduces the risk to banks. Without a change to the rule, the industry argues that it will be significantly more expensive to offer derivatives to clients that are subsequently settled at clearinghouses.

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