(Reuters) - Allowing swaps clearinghouses to turn to central banks for the same kind of emergency loans that banks can access would add to financial stability in important ways, Chicago Federal Reserve President Charles Evans said on Tuesday in Shanghai.
Since the financial crisis, regulators in the United States and elsewhere have forced much of the world’s nearly $500-trillion swaps market into centralized clearinghouses, seen as safer than the unregulated trader-to-trader market.
But regulators worry that concentrating risk in this way means that the failure of a clearinghouse could have a major impact on the broader financial market, and they are seeking ways to minimize spillovers during times of financial stress.
Giving central banks the ability to provide emergency liquidity lines to clearinghouses would be an important step in that direction, Evans said in remarks prepared for delivery to the Symposium on OTC Derivatives.
During the financial crisis, the Fed’s ability to provide emergency loans to banks which otherwise may have had no access to liquid funds was seen as a critical bulwark against complete financial meltdown.
“Of course, in such a situation, central bank liquidity provision should be the last alternative that a [central counterparty clearinhouse] might utilize,” Evans said. “Any liquidity loans from the central bank must be secured with sufficient collateral — as the Federal Reserve does with all of its discount window lending to depository institutions — so that the taxpayers are never at risk.”
Evans did not comment on monetary policy or the U.S. economic outlook in his speech.
Reporting by Ann Saphir; editing by Diane Craft