* Punitive capital charge seen firms pull out of clearing business
* Speech come days after Cohn warned of “major risk” from clearers
* CFTC should have power to wind down troubled clearers -Quintenz (Adds quotes, context)
By Michelle Price
WASHINGTON, Oct 17 (Reuters) - Bank capital rules are concentrating risk inside the clearing system and making clearing houses increasingly systemically important, the U.S. Commodity Futures Trading Commission’s Brian Quintenz said on Tuesday.
Speaking at a conference hosted by the Federal Reserve Bank of Chicago, the Republican commissioner warned that capital rules known as the supplementary leverage ratio have made it too expensive for banks to provide clearing services, leading many to pull out of the business.
The ratio imposes a punitive charge on cash held by banks on behalf of clients to secure their trades held at the clearing house.
This additional charge has led many banks to pull out of client clearing, resulting in more derivatives trades being concentrated among fewer clearing house member firms and increasing the overall risk housed by derivatives clearing organizations, or DCOs.
“Despite all our efforts regarding DCO resilience, recovery, and resolution, there continue to be concerns that DCOs concentrate risk within the financial system and pose a systemic threat to financial stability in the event of a crisis,” said Quintenz, who was confirmed by the U.S. Senate in August.
Rules introduced following the 2007-2009 financial crisis have forced banks to push hundreds of billions of dollars worth of over the counter trades through clearing houses, which sit in between a trade to guarantee payment should either counterparty to the deal default.
The comments come days after National Economic Council director Gary Cohn said he sees a “major risk” evolving in clearing houses and that they were becoming a “new systemic problem”.
Because clearing houses connect multiple large banks through a shared pool of trades and collateral, the failure of a clearing firm could send shockwaves across the financial system.
“The more a DCO’s clearing membership consolidates, the less the clearing system mutualizes risk and the more it interconnects firms’ exposures,” said Quintenz, adding: “Might we be encouraging the Armageddon scenario we are so explicitly trying to avoid?”
The U.S. Treasury recommended in a report this month that regulators should review the leverage ratio.
Quintenz added that clearing concentration also makes it more difficult for regulators to wind down a failing clearing house, because there would be fewer firms to which they could quickly transfer trades.
The commissioner called for U.S Congress to appoint the CFTC, rather than the Federal Deposit Insurance Corporation, as the primary authority with the power to wind down a clearing house in the event of failure.
Reporting by Michelle Price; Editing by Chizu Nomiyama and Meredith Mazzilli