Bernanke: Clearinghouses Pose Risks, Too

Regulators must step up oversight of clearinghouses now that derivatives markets are becoming increasingly reliant on them, Federal Reserve Chairman Ben Bernanke said on Monday.

In remarks that did not touch on the outlook for the U.S. economy and monetary policy, Bernanke focused on the risks posed by greater centralization of trades in the $600 trillion over-the-counter derivatives market.

He argued that just because clearinghouses have fared well in past crises does not mean that they were any less of a threat to the financial system as a whole.

"We should not take for granted that we will be as lucky in the future," Bernanke told a conference sponsored by the Atlanta Fed. "The flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations."

During the financial crisis of 2007-2009, many parts of the credit markets all but shut down as banks became afraid of lending to one another for fear of who might be sitting on a pile of bad loans.

Under the Dodd-Frank financial reform legislation, most private derivatives contracts will be forced to go through clearinghouses, so that the clearinghouse can stand between the two parties and assume the risk if one party defaults. Derivatives risk would then be concentrated in the clearinghouse instead of the counterparty.

With much of the private derivatives market to be forced through clearinghouses, some of the biggest, including those run by CME Group Inc, the OCC, and IntercontinentalExchange Inc, are expected to be designated as systemically important by a council of regulators.

Bernanke said that since these firms could be given access to Fed loans during a crisis, it would be important to ensure they had strong credit and liquidity risk management practices in place, ample liquidity, high-quality collateral and effective member-default procedures.

"As we rely even more heavily on these institutions in the United States and around the world, we must do all that we can to ensure their resilience," Bernanke said.

Indeed, Bernanke argued that it was important to ensure clearinghouse firms are subjected to similar standards for oversight in major economies around the world.

"We hope that the regulatory agencies in the United States, and those in other major countries, can adopt a single set of enhanced risk-management standards that will apply to all systemically-important financial market utilities globally," Bernanke said.