EU watchdog says clearing houses resilient, tougher daily checks needed

By Huw Jones

LONDON (Reuters) - Clearing houses for derivatives in the European Union must use tougher assumptions when checking their daily resilience to market shocks and defaults by members, the bloc's securities watchdog said on Friday.

The European Securities and Markets Authority (ESMA) published the results of its first annual region-wide "stress test" that covered 17 clearing houses in the EU.

The aim was to see how well the sector could withstand market shocks and many members - typically banks - defaulting at the same time, without destabilising the financial system or needing taxpayer bailouts.

Clearing houses or central counterparties (CCPs) are set to grow as regulators make clearing in the $550 trillion (376 trillion pounds) derivatives market mandatory, raising concerns of a new breed of "too big to fail" institutions.

Clearing houses like LCH.Clearnet (LSE.L), Eurex Clearing (DB1Gn.DE) and ICE Clear Europe (ICE.N) stand between two sides of a trade to ensure its completion even if one side goes bust.

"The results of the test shows that the system of EU CCPs can overall be assessed as resilient to the stress scenarios used to model extreme but plausible market developments," ESMA said in a statement.

However, the daily stress testing that clearers conduct on themselves is less tough than the minimum shocks set out in the EU test, ESMA said.

Clearing houses will be asked to revise the "price shocks" they use for the daily tests, which could indirectly lead to higher margin or cash calls on members to back trades.

No individual clearing house was named.

Under more extreme test scenarios where more than 25 clearing members default, there were EU-wide losses of up to 4 billion euros ($4.6 billion).

Clearing houses in the EU have in total more than 150 billion euros in funds to call on in a crisis.

The results will be scrutinised by analysts to see if they affect the planned merger of Deutsche Boerse (DB1Gn.DE) and London Stock Exchange Group (LSE.L) which has raised the prospect of big savings for customers by linking their clearing houses.

ESMA said that following the stress test, clearers will also be asked to check the creditworthiness of members who are also members of other clearers.

Under EU rules, clearing houses must be able to withstand its two biggest members defaulting.

"What these rules do not take into account is the possibility of the knock-on effect across CCPs," ESMA Chairman Steven Maijoor told reporters.

"We think at this stage the rules are robust and there is no reason on the basis of this stress test to make changes to the rules," Maijoor added.

No clearing house will be told by regulators to ask for more margin from customers. Margin makes up 75 percent of a clearing house's defences.

(Reporting by Huw Jones, editing by Carolyn Cohn and Susan Fenton)