–Updating 15:46 ET Story, Adding Identification of Clearing Houses
–Applying Extra Risk Requirements to 8 Clearing Houses
–Still Considering More Controversial Non-Bank SIFIS

By Denny Gulino

WASHINGTON (MNI) – The perhaps least-desired Washington honor was
bestowed Wednesday for the first time, with eight financial clearing
houses now facing additional risk management requirements, all
compliments of the Financial Stability Oversight Council.

The so-called financial market utilities are the least
controversial of a long list of companies, both banks and non-banks,
that the FSOC will eventually place in the regulatory spotlight as
crucial to the functioning of the financial system.

None of the first eight put up a fight and they accepted the
designation as inevitable, but many insurance firms, hedge funds, asset
managers and now unregulated money funds are trying to escape the
designation which for many mean costly capital buffers beyond what exist
now. Those chosen are often considered “the plumbing of the financial
system,” according to the Council.

Any firm designated gets a chance to argue why they aren’t that
systemically important but the FSOC has the final word.

As the Council’s meeting began Wednesday afternoon, the firms had
not yet been informed of their new status although all had been told
their designations were being considered. Later in the afternoon, after
their designations were confirmed, they were publicly identified and
there were no surprises.

The Clearing House Payments Company and its CHIPS system and CLS
Bank International, both regulated by the Federal Reserve, were first on
the list. The Chicago Mercantile Exchange’s clearing operation,
regulated by the CFTC, and the Depository Trust Corporation, under the
SEC, were included.

Every market’s clearing house was on the list, including the Fixed
Income Clearing Corporation, ICE Clear Credit, the National Securities
Clearing Corp, and the Options Clearing Corp.

More may be added as the FSOC takes “another key step towards
creating a safer, more resilient financial system,” a Council statement
said.

Although some financial market and services firms are so dominant
in the financial system that there is no chance they can avoid the
so-called SIFI designation, many on the borderline would rather escape
the new title since it can bring with it the need for extra capital
being tied up in safety buffers.

Such is not the case for the first eight, all of whom have funds
contributed by their members as backup, and which can make margin calls
to claim additional funds when there are problems.

“As we approach the anniversary of the Dodd-Frank Wall Street
Reform and Consumer Protection Act this Saturday, it is worth
remembering why these reforms are so important,” FSOC Chairman and
Treasury Secretary Tim Geithner said to his peers on the Council —
which includes the head of every financial market regulatory agency in
Washington.

“If you need a reminder of why these reforms are important, then
take a moment to reflect on the number of people still out of work, at
risk of losing their home, or struggling to finance a growing small
business,” Geithner said. “And if those reminders are not enough,
consider the failures of MF Global and Peregrine Financial, the risk
management failures at JPMorgan, the abuses surrounding LIBOR, or the
financial threats from Europe. This work is not done.”

Geithner gave SEC Chairman Mary Schapiro a platform from which to
promote her recommendations for money market fund reforms, proposals
which have split the Commission. They are still vulnerable to “cascading
failures” and the Commission, she said, is studying the issue closely.

Both Geithner and Federal Reserve Chairman Ben Bernanke followed up
with their endorsements of her efforts to devise a rule imposing changes
on the funds to put out for comment.

The Council also approved its annual report to Congress which makes
up a list of its targets for the future, including the tri-party repo
market and securities lending. The annual report reiterated how
vulnerable money market funds remain and touched on the Libor scandal,
without going beyond what officials have already said about the need for
reform.

The Financial Stability Oversight Council has so far been able to
keeps its votes unanimous among the 10 voting members but the individual
regulators have varying priorities of their own and take the lead in
deciding priorities in their jurisdictions. As FSOC chairman, Geithner
has one vote of 10 and most Council declarations do not bind the member
agencies.

As international regulatory standards are established the U.S.
regulatory agencies are conforming their own regulations to some extent,
though some standards are still being debated even as new Dodd-Frank
regulations be the dozens are being considered.

** MNI Washington Bureau: 202-371-2121 **

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