* U.S. risk council approved initial list this week
* LCH.Clearnet was left off list, sources say
* Clearinghouses see label as helpful for business
* Expert says regulators may fear international reach
By Ann Saphir
CHICAGO, May 25 (Reuters) – LCH.Clearnet, the world’s
biggest clearer of interest-rate swaps, did not make an initial
list of global clearinghouses labeled “systemically important”
by a council of U.S. regulators earlier this week, three sources
familiar with decision said.
LCH.Clearnet, a London-based firm set to be bought by the
London Stock Exchange at the end of the year, had
earlier said it fully expected to get the label.
The label subjects clearers to tougher oversight but also
potentially gives them access to valuable services, such as
keeping funds at a Federal Reserve bank.
While firms such as insurers and hedge funds are eager to
dodge the designation, many clearinghouses see it as a form of
government endorsement that could appeal to customers.
Clearinghouses stand to get a windfall of business in the
coming years as financial reforms force market players to route
swap trades through clearinghouses.
CME Group Inc, IntercontinentalExchange Inc’s
ICE Clear Credit, and options clearinghouse OCC were
among those clearinghouses that did receive the proposed
designation on Tuesday, executives at the clearinghouses have
said.
There is little question that LCH.Clearnet also is a giant.
LCH.Clearnet’s SwapClear unit, which handles interest-rates
swaps, cleared $1.7 trillion in notional value on Thursday
alone. About a third of its cleared trades are in U.S. dollars.
By comparison, OCC, which did receive the “important”
designation, cleared $3 trillion in notional value in all of
2011. OCC is the only clearinghouse for U.S. stock-options
exchanges.
“Systemic risk knows no borders,” said Michael Greenberger,
a former futures regulator and now a professor at the University
of Maryland. “If LCH were to default and collapse, we would feel
it very much in the U.S. It would create a world economic
problem.”
Clearinghouses designated as systemically important will be
overseen by the Fed, in addition to their current regulators.
Greenberger said he believed the council did not designate
LCH because it was concerned the Fed could not adequately
regulate a foreign-based financial institution.
“I think as a matter of international relations and perhaps
legal extraterritoriality reasons, it could not have been done,”
he said. LCH is regulated by the UK-based Financial Services
Authority. Its U.S. unit is also registered with the Commodity
Futures Trading Commission.
A Treasury Department spokesman declined to comment about
the decision on LCH, citing the final rule from the Financial
Stability Oversight Council that reads, “Maintaining the
confidentiality of the notices (of potential designation) and
information requests is important to prevent potentially
destabilizing market speculation that could occur if the Council
were to make such notices public.”
An LCH spokeswoman in London also declined to comment.
The council, created under the Dodd-Frank financial reform
law, expects to make a final decision on the initial set of
clearinghouse designations as early as this summer.
Those chosen as “systemically important” would gain access
to the Fed Reserve’s emergency lending facilities but would also
be required to comply with tough new rules on capital, liquidity
and how much exposure they can have to other firms.
The idea behind having some clearinghouses subject to
greater regulatory scrutiny is that they must be more closely
policed because their failure could roil financial markets.
