Gary Cohn Calls Clearinghouses a ‘New Systemic Problem’

  • Ex-Goldman Sachs president raises issue at banking conference
  • ‘It’s the things we can’t liquidate that scare me,’ he says

President Donald Trump’s chief economic adviser Gary Cohn said he sees a major risk evolving in clearinghouses, platforms that regulators turned to for swaps following the 2008 financial-market crisis.

Cohn speaks at the G30 on Oct. 15.

Photographer: Olivier Douliery/Bloomberg

As “we get less transparency, we get less liquid assets in the clearinghouse, it does start to resonate to me to be a new systemic problem in the system,” Cohn, director of the White House’s National Economic Council, said at a banking conference in Washington on Sunday.

Cohn isn’t the first to raise the risk. JPMorgan Chase & Co. and BlackRock Inc. have argued for years that clearinghouses pose their own threats, shifting risk to just a handful of entities. The Treasury Department’s Office of Financial Research has warned that clearinghouses used for derivatives trades can be vulnerable and potentially spread risks through the financial system.

Cohn himself flagged the concern when he was at Goldman Sachs Group Inc. -- but now he’s in a policy position with more sway over how the issue is resolved. Trump is considering him among several others to be the next chairman of the Federal Reserve.

When it comes to future financial risks, “this is where we should spend some time,” Cohn said Sunday. “Like every great modern invention, it has its limits, and I think we have expanded the limits of clearing probably farther beyond their useful existence.”

After the crisis, U.S., European and Asian authorities required that most derivatives be guaranteed at clearinghouses instead of allowing risks to mount directly between traders. That move increased the role of platforms owned by CME Group Inc., Intercontinental Exchange Inc. and LCH.Clearnet Group Ltd., where traders clear swaps tied to interest rates, bonds and other assets.

Banks deposit collateral at clearinghouses to protect against defaults, while clearinghouses also contribute some of their own capital. If both of those funding sources are exhausted in a time of stress, a clearinghouse could then require banks and other members to pick up the tab.

“It’s the things we can’t liquidate that scare me,” Cohn said.

— With assistance by Silla Brush, and Jesse Westbrook

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