BOE’s Bailey Says Clearing Houses Pose Risks If Poorly Managed
(Bloomberg) -- Clearing houses pose a risk to the financial system if they are not robustly operated, Bank of England Governor Andrew Bailey said.
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Bailey said on the sidelines of international finance meetings on Thursday in Washington that central counterparties should be able to dampen the shock of a bank failure by mitigating credit risk. But they can “pose significant risks to the stability of the financial system,” if poorly managed, Bailey said.
“Unsafe clearing would be worse than no clearing, it would amount to concentrating the risk in one unsafe house,” he said, according to remarks prepared for delivery at a memorial event for his late friend, Mike Gill, the former chief of staff at the US Commodity Futures Trading Commission
Clearing and settlement houses ensure a stock, bond or derivatives trade is safely concluded with ownership and custody swapped for cash. The sector includes the London Stock Exchange’s LCH clearing unit and Euroclear UK, which were overseen by Brussels until Britain left the European Union.
Clearing became a political flashpoint in the aftermath of Brexit, with the UK battling to retain EU clearing activity. The UK ultimately won a deal earlier this year that kept much of the business in London.
In his speech, Bailey said, “there are benefits of scale and scope in clearing. Yes, there is contagion risk if a CCP fails, and especially where it is large in its market, but there are real benefits of scope and scale.”
That puts an “obligation on us as regulators of clearing houses to enable the safe operation of the global financial system.”
“A consequence of central clearing is that CCPs themselves become a financial network which can bring about the contagion of financial instability if they are not robustly established and operated,” he said.
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