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Bank of England mulls tougher capital rules for clearing houses

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Financial institutions which settle trillions of dollars of derivative contracts a day may need to hold more capital to stop them requiring a government bailout if they fail, a senior bank of England official said on Monday.

[LONDON] Financial institutions which settle trillions of dollars of derivative contracts a day may need to hold more capital to stop them requiring a government bailout if they fail, a senior bank of England official said on Monday.

David Bailey, a BoE official responsible for financial market infrastructure, said clearing houses - also known as central counterparties (CCPs) - might need to build up bigger capital buffers, as banks are already being required to do.

BoE Governor Mark Carney heads the Financial Stability Board (FSB), a body which advises leaders from the G20 group of major economies on financial regulation and is increasingly concerned about risks posed by institutions other than banks.

"There is ... an important question as to whether CCPs are resolvable in their current forms, and ... whether changes to the liability structure of CCPs are necessary to make this approach credible, without recourse to taxpayer funds," Mr Bailey said at an event hosted by Deutsche Boerse.

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"The FSB has recently proposed that there must be a minimum level of 'Total Loss Absorbing Capacity' for banks, and we will need to consider carefully whether and how this concept could be effectively translated to CCPs," Mr Bailey added in his speech.

Volumes at clearing houses such as ICE, CME Group and LCH Clearnet are set to grow significantly as banks are forced by regulators to clear their derivatives transactions through CCPs to increase safety and transparency.

REUTERS

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