Don't bank on users to rescue clearing houses top regulator warns

By Huw Jones

LONDON (Reuters) - Customers of a failed clearing house should only be made to stump up cash as a "last resort", otherwise they risk being put off using the system, global regulators warned on Wednesday.

Clearing of many derivatives was made compulsory to inject more transparency and safety following the financial crisis, when their opacity helped to accentuate the market fallout.

This has prompted the expansion of firms like LCH (LSE.L), Eurex Clearing (DB1Gn.DE) and ICE Clear (ICE.N) which stand between two sides of a stock, bond or derivatives trade to ensure the transaction is completed, even if one side goes bust.

To avoid them becoming "too big to fail", the Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 economies (G20), has published draft guidance which sets out how regulators can close down a failing clearing house.

It also lists the tools they should have to move swiftly in a crisis to avoid contagion. The European Union has already pushed ahead with a draft law on equipping regulators with tools to tackle failing clearers.

Clearing houses already have a default fund, but if losses are greater than the fund, then "margin" cash posted by clients, such as asset managers, could be used to plug the hole.

Fund managers have fiercely resisted this, saying this cash is owned by savers and pensioners and the FSB says such "haircuts" should be "limited to use as a last-resort-tool", with alternatives including members contributing more into a clearing house's default fund.

"Jurisdictions should take into due account the impact on financial stability and on incentives to centrally clear," the FSB says in its draft guidance.

The financial sector has resisted attempts by regulators to set a fixed point beyond which closure of a clearing house starts automatically, saying attempts to keep them going should be given plenty of time.

The FSB suggests several indicators that "should not be regarded as exhaustive or as fixed or automatic triggers", adding that national regulators should consider announcing publicly which ones shape their closure decision.

The FSB said it will look further into the issue and may provide further guidance by the end of 2018.

(Editing by Alexander Smith `)