Clearinghouses are now considered systemically important to financial markets. But with that designation are new regulations and capital requirements. John Lothian News sat down with Kim Taylor of CME Clearing to talk about how a new requirement could raise costs for market participants.

Commodity Futures Trading Commission (CFTC) regulation 39-33, passed on November 15,  is a capital requirement that is set to be implemented by the end of the year. It calls for US-based clearinghouses to be designated as qualified central counterparties (QCCPs), which ultimately would give them more favorable capital requirements under Basel III but tough capital US guidelines.

It would also set international standards and details the types of securities a QCCP can hold. The requirement also means that QCCPs must hold enough capital to survive a default by two clearing members concurrently. The problem is that the rule will not allow the use of certain securities such as US Treasuries as liquid resources. In other words, exchanges must have credit lines to cover even US Treasury bonds, and that could be costly for the clearinghouse, and ultimately its member firms.

Clearinghouses might change their policies around the acceptance of securities, or seek larger lines of credit which could ultimately make the cost much higher.   

“At the same time they are saying ‘Banks, don’t lend’” regulators are saying “Clearinghouses, get more bank lines,” says Taylor, president of CME Clearing at CME Group. “It will increase the cost of doing business in some way.”

In a letter from the CME Group to the CFTC, the exchange said the new rule means that its liquid facility costs would “approximately double.” This could force some clearing members out of the clearing business altogether, CME argued.

Regulators and the Fed argue to trying to liquidate a huge portfolio of bonds would take too long in a crisis. The rule was finalized by the CFTC on November 15.

CFTC regulation 39-33 reqources

  • CFTC Final Rule: Derivatives Clearing Organizations and International Standards (link)
  • Payment and Settlement Systems Regulation – White Paper – Principles for Financial Market Infrastructures – CPSS/IOSCO, April 2012 (link)
  •  Derivatives Clearing Organizations Regulation (link)

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