EU Regulators Warn Clearing Houses Need More Checks

When it comes to ensuring the resiliency of clearing houses that process derivatives, better checks and balances are necessary in the European Union, according to a regulatory watchdog in the region.

The New York Times reported that the regulatory body, the European Securities and Markets Authority, came to the conclusion, announced on Friday (April 29), upon issuing the findings of its first annual “stress test,” spanning 17 clearing houses in Europe. As has been the case with other stress tests in other regions and across other institutions, the key factor and input have been stress tests, and the aim has been to see how defaults can be handled without the ultimate impact of needing taxpayer rescues.

As NYT reported, clearing houses are becoming ever more important to the financial system as regulators are in the process of making the clearing process mandatory when it comes to derivatives. The firms themselves, including Eurex Clearing and ICE Clear Europe, act as middlemen in transactions, guaranteeing that they will be put through even if one side of the trade “goes bust.” It’s a huge market as the derivatives industry is estimated to be $550 trillion annually.

The overall industry, according to the stress test, is one that is well-positioned to withstand shocks but that will need more stringent stress tests (on a daily basis) than the ones already in place. The overarching theme is the industry must withstand its two biggest members toppling into default. Such parameters would see scrutiny amid the merger that has been announced between Deutsche Boerse and London Stock Exchange Group, as both have said they will link together their clearing houses in an effort to pass cost savings along to customers.