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Securities regs must identify systemic risk

Friday 22 July 2011 - by Andrew Hickley

Securities regulators in the US must cooperate in the oversight of large clearing agencies in order to identify a build-up of systemic risk.

The Commodity Futures Trading Commission, the Securities and Exchange Commission and the Federal Reserve Board should implement an "ongoing consultative mechanism" promoting a shared understanding of potential systemic risks in the markets, a report from the three regulators says.

The trio should also exchange their insights on effective supervisory risk management practices and techniques clearing agencies use, it argues.

Although the regulators each have risk management supervision programmes focusing on core risks provided by systemically important designated clearing entities, referred to in the report as DCEs, it argues that these differ between each agency.

Because the regulations supervise different types of entities and markets, this could lead to different analyses of systemic risks emerging from the DCEs they oversee.


As a result, the report calls for regulators to share their "unique perspectives" as an "important mechanism" to identifying risks they may have been unaware of.

"For example, the staffs of the CFTC, the SEC, and the Board may identify, in their individual risk assessments, the use of the same commercial banks by multiple DCEs as settlement banks or as providers of back-stop liquidity to the DCEs," says the report, published on Thursday.

"As a result of consultation, the three agencies should be more readily able to identify such common DCE dependencies and understand the potential systemic risk posed by reliance on the same commercial banks."

The report suggests that a memorandum of understanding could be signed between the regulators to ensure an effective communication.

This consultative approach should provide "greater consistency of supervisory inquiry from which the agencies can promote greater awareness of systemic risk".

Send us your thoughts (in strict confidence) or submit an article in response:
Email: andrew.hickley@gfsnews.com


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