Regulators see slow progress on who pays for failed clearing house

By Huw Jones

LONDON, June 10 (Reuters) - Global regulators have yet to agree on who would pay the trillions of dollars that would be needed to bail out any failed clearing house for derivatives, a senior European Commission official said on Friday.

While policymakers don't want taxpayers to rescue clearers, central banks like the Bank of England and European Central Bank have said they would offer backstops to clearing houses in emergencies.

After the 2007-09 financial crisis, new rules were introduced to require far more derivatives trades to pass through a central counterparty (CCP) or third party backed by a default fund.

Some of the world's biggest clearers like LCH.Clearnet and Eurex Clearing are in Europe and handle securities worth trillions of euros.

The European Commission is due to propose a draft EU law later this year on how to deal with failing clearers.

"We must start looking and be prepared for the possibility that a globally important CCP could enter into default," Patrick Pearson (Xetra: 858266 - news) , a senior European Commission official involved in the drafting, told the International Derivatives Expo conference.

The worry is that the "waterfall" or order in which different sources of money are allocated to cover loses, won't be enough.

"What happens after the waterfall?" Pearson said, listing many options, all of which have their drawbacks.

Forcing clearing houses and their members to hold more default funds is difficult when the amount of cash needed runs into "nine zeros in most cases", Pearson said.

There is also a battle over skimming some of the collateral or assets owned by end users of clearing houses, such as fund managers. Asset managers say this pot belongs to savers who should not be penalised.

"All of this is very much under discussion not only in Brussels but in New York, Washington and in Asia," Pearson.

He said clarity would be needed on whether central banks will stand behind a clearing house and under what circumstances.

"How does this work across currencies, euro zone, non-euro zone, dollar?" Pearson said.

Transparency "upfront" is needed on the nature of any central bank liquidity lines for clearing houses.

"It's going one step too far to get public statements from a central bank that they would always stand behind a CCP," Pearson said.

A blanket central bank guarantee could create unintended consequences, such as a clearing house then taking less care about mitigating risks, he added.

"It's not necessary, it's not desirable but that discussion should be had." (Editing by Susan Fenton)