Global banks, funds add allies in push for clearinghouse capital

A group of nine global banks and investment management companies said on Tuesday that 10 more institutions have joined their push for regulators to require for-profit derivatives clearinghouses to put up more capital against cascading losses that might rock the world financial system.

The announcement is another attempt to break a years-long stalemate between the clearinghouse and their customers over how much capital each should have ready to quickly absorb gigantic losses from traders going bust.

Representatives of the group said the drive to expand the coalition started before the current market turmoil. But the announcement raises timely questions about the ability of part of the financial system to hold up under extreme stress.

Strengthening rules to ensure clearinghouses could be wound down safely may be the most significant unfinished work on reforms started after the 2008 financial crisis, regulators have said.

Without much success, JPMorgan Chase & Co, the biggest U.S. bank by assets, has been persistent in calling for clearinghouses to shoulder more risk, warning that they currently have too little incentive to protect against defaults, operational failures and cyber attacks.

JPMorgan issued papers making its case in 2014 and 2017. In October it was joined by eight other firms, including units of Allianz, BlackRock Inc and Citigroup Inc in posting a new paper. That paper has now been signed by 10 more firms, including units of ABN Amro Bank, Barclays Plc, Commonwealth Bank of Australia, Deutsche Bank, Franklin Resources and UBS Group AG

After the October paper came out executives of clearinghouse operator CME Group Inc said they had told regulators they were concerned about the group's agenda.

Clearinghouses say banks, sometimes known as member firms, and their investment fund customers need to have their capital at risk as incentives to limit risky trading.

After the financial crisis, global regulators put clearinghouses at the centre of trading in over-the-counter credit derivatives and interest rate swaps.

The clearinghouses, also known as central counterparties, stand between both sides of trades and ensure their completion even if one side fails.

Since the changes, central clearing of derivatives has taken off, European Central Bank board member Fabio Panetta said in a speech last month in which he lamented the "stalemate" between the two camps.

Companies that clear credit default swaps or interest rate swaps include units of Intercontinental Exchange Inc and the London Stock Exchange Group, as well as CME Group.

(Reporting by David Henry in New York. Additional reporting by John McCrank. Editing by Steve Orlofsky)

By David Henry