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Apr 08
2011

Bernanke calls for stricter financial clearinghouse regulation

Posted by annearf in Riskfinancial clearing housesFederal ReserveBen Bernanke

annearf

Should there be more stringent risk requirements for financial clearinghouses responsible for payments, securities, and derivatives transactions?

 According to Fed Chairman Ben Bernanke, the answer is, most definitely yes.

 In a recent speech at the Federal Reserve Bank of Atlanta's Financial Markets conference, Bernanke called for stricter rules governing such clearinghouses, citing their importance as the "plumbing" of the financial system. Handling enormous volumes of financial transactions each day, from common stock to options, they take over counterparty risk for trillions of dollars of trades.

The point is, because they didn't do badly during the market meltdown, they haven't received that much attention. That, said Bernanke, is a mistake. "Nevertheless, the smooth operation and financial soundness of clearinghouses and related institutions are essential for financial stability, and we must not take them for granted," he said.

That's particularly important because Dodd-Frank encourages greater reliance on clearinghouses to address weaknesses identified in other parts of the financial system. "Of course, increased reliance on clearinghouses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves," he said.

Specifically Bernanke called for US regulators to set stronger risk-management rules related to credit and liquidity requirements and stricter oversight. That's something Dodd-Frank also includes. He also advocated for more coordination among relevant regulators, both in the US and internationally. And he said that the Fed is working closely with the SEC and others, as well as central banks from more than 20 countries, to address international standards. The goal: one universal international set of risk-management standards.

There aren't a whole lot of these financial clearinghouses in the US. What's more, just because they made it through the crash doesn't mean they can't fail. Sure Bernanke and the Fed largely closed their eyes and let the meltdown happen. But that was then. Let's hope people act on Bernanke's cautionary recommendations.

 

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