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Banks outline proposals to avoid clearing house bailouts 

May 25, 2016

Joe Rennison, Financial Times

The finance industry has outlined proposals to avoid any future government bailouts of derivatives clearing houses, which some critics fear have become the new too-big-to-fail institutions.

A joint report put out Tuesday by the International Swaps and Derivatives Association, which represents derivatives industry participants, and The Clearing House, which represents large banks, outlined ways to tackle the systemic risks posed by clearing houses.

Clearing houses, or “central counterparties” (CCPs), are integral to regulators’ post-crisis reform of the $500tn “over-the-counter” derivatives market, standing in between trades in an attempt to reduce counterparty risk.

More than 70 per cent of the over-the-counter derivatives market is now cleared, as opposed to being traded bilaterally between two counterparties, according to the report. Central clearing of certain derivatives contracts has been mandatory in the US since 2013, and is due to come into force in Europe this year.

It has raised the concern that the sheer volume of trades now cleared through a small number of clearing houses has made them the new too-big-to-fail institutions, and if a large clearing house were to get into trouble regulators would be forced to bail them out. Read more

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