Clearinghouses face tougher EU capital rules as Council debates proposals

Proposals for EU clearinghouses to come under tougher capital rules — a move the world's biggest banks have been calling for — will be discussed this week by member states, MLex has learned.

On 4 November, finance officials from the 27 EU countries will consider proposals on requiring clearinghouses to have more "skin in the game," according to documents seen by MLex. Effectively, they would require the companies to put up more of their own funds in a downturn.

​The meeting of government officials, known as attachés, is part of Council discussions led by the Finnish presidency on the proposed EU regulation known as central counterparty (CCP) recovery and resolution.

Participants will consider introducing a second level of skin in the game. This would have clearinghouses use more of their own resources to cover losses from a default, before resorting to tapping healthy, or non-defaulting, banks.

The discussion comes after call by Goldman Sachs, JP Morgan and others for clearinghouses to take more responsibility for losses from customer defaults, bring a long-running debate over the issue to a head.

But companies in the clearinghouse sector say stepped-up capital requirements would result in reduced competition, increased costs and potentially cause some to go out of business.

Waterfall

The debate centers on how much capital clearinghouses put into the so-called waterfall — the funds used to cover losses when a default occurs.

Typically, the current waterfall structure draws first from the defaulting customer, wiping out the collateral and contribution to a default fund the member has put up. Next, it pulls in a portion of the clearinghouse’s capital, and then the contribution from non-defaulting banks is tapped.

The big financial institutions argued in last week's paper that for-profit clearinghouses do not have enough skin in the game to encourage them to balance risk management and profit-taking properly. These companies should be required to hold a more “meaningful" amount, they said.

Clearinghouse are warning strongly against the move from the Council and oppose adding a second layer of skin in the game.

Rafael Plata, secretary general of the European Association of CCP Clearing Houses, said the purpose of skin in the game is to incentivize risk management, not to cover losses.

"Smaller clearinghouses could be put out of business unnecessarily," the head of the Brussels-based organization said. "We think this could affect at least five out of the 16 clearinghouses in Europe."

Plata said the EU should wait for further international guidance from the Financial Stability Board, which is currently undertaking work on clearinghouse equity in resolution, before making a move.

In addition to the skin-in-the-game question, officials on Monday will discuss governance in clearinghouse recovery and resolution, and delayed enforcement of contractual obligations.

While any decision on Monday would not spell an immediately legal requirement for clearinghouses, it remains a concern for them. Any position agreed upon by EU member states would need to be negotiated at trilogue level, where countries are joined by the European Commission and Parliament to agree on a final text.