ICE seeks rules to prevent clearing house failures

By Jane Baird LONDON, Nov 12 (Reuters) - IntercontinentalExchange Inc. called on regulators to set standards for the margins that central clearing houses must set aside to guard against collapse in the more than $600 trillion derivatives market. "We are hoping regulators will solve this problem," ICE Chairman and Chief Executive Jeff Sprecher said on Thursday. But ICE has no idea when regulators might come up with guidelines, he said. "In the United States, it is not even clear who the regulator is going to be." Lawmakers and regulators are moving to require that a large share of derivatives contracts go through central clearing houses to prevent a domino-like collapse of the financial system if a major dealer, similar to Lehman Brothers, goes under. Such a shift also concentrates counterparty risk, however, and can make the central clearinghouses themselves too big to fail without threatening the entire financial system. To provide clearing houses with the means to cover this risk, all of their members put up initial margins on trades plus additional collateral to cover any decline in the market value of contracts. ICE, which has the support of major dealers including Barclays, Goldman Sachs and Deutsche Bank, has quickly become the leading clearing house on both sides of the Atlantic in the credit default swaps (CDS) market this year. So far, it has cleared CDS with a gross notional value of nearly $3 trillion in the United States and nearly $1 trillion in Europe, out of a market that totals $26.4 trillion according to the Depository Trust & Clearing Corp. Sprecher and Paul Swann, president of ICE Clear Europe, said ICE has made conservative assumptions that it must set aside enough margin to survive the simultaneous collapse of its two largest members and enough to give it five days to liquidate its holdings after a collapse. That currently amounts to between $5 billion and $6 billion in the United States and roughly $1 billion in Europe, they said. FEAR RACE TO BOTTOM But unless regulators step in to enforce standards on all new clearing houses, other players could seek to compete by easing margin requirements and force ICE to relax its standards as well. "We don't want to see a race to the bottom for risk management," said Sprecher, who was in London to mark the one-year anniversary of ICE Trust, its CDS clearing arm. In the futures market, there has been no competition based on margins, because all clearing houses use a model developed in 1991 by the Chicago Mercantile Exchange. That well-proven model does not fit derivatives, and clearers are now developing their own. "The models don't have to be the same, but they should be operated on the same assumption set. If you run a model based on the collapse of only one dealer and liquidation within two days, you get a very different result in orders of magnitude in the margins," Sprecher said. "Regulators need to broadly agree on some of these assumptions and require clearing houses to demonstrate they can meet these assumptions," he added. In the United States, bills currently before Congress propose to split oversight of derivatives between the Securities and Exchange Commission and the Commodity Futures Trading Commission, and the proposals are still open to change. In Europe, future supervision of central counterparties also is unclear, an industry lobby said on Thursday. Under EU plans to reform financial supervision now being adopted, a new pan-EU authority will license central counterparties, but they will still be supervised nationally. "This suggests quite clearly there will be a migration of regulatory authority away from national supervisors, and that will create tension," Futures and Options Association Chief Executive Anthony Belchambers told reporters. Belchambers expects the European Union to propose a draft law next year to beef up governance standards at clearers as they become systemically much more important. "That will impact clearing costs. Clearing houses will compete on fees and level of efficiency... On setting margins, I don't think they will compete on that," Belchambers said. (Additional reporting by Huw Jones) Keywords: ICE CLEARING/ ([e-mail], Reuters Messaging: [e-mail], [phone]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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