BOE's Bailey Warns of Clearing House Risks

Bank of England Governor Andrew Bailey has highlighted the potential risks posed by poorly managed clearing houses, emphasizing their significance in the broader context of financial market fragmentation. In a recent speech, Bailey emphasized the importance of robust global standards and international cooperation to mitigate these risks.

Clearing houses play a crucial role in the financial system, facilitating the settlement of trades between counterparties. However, Bailey cautioned that fragmentation in this market infrastructure can create rather than reduce risks. He noted that large, well-run markets support financial stability, while fragmented ones can be inherently less stable and increase market functioning costs.

The governor argued that a necessary foundation for financial system openness is robust global standards and trust. He emphasized the importance of cooperation with standard-setting bodies such as the Financial Stability Board and IOSCO to establish stronger international regulatory standards.

To mitigate the risks posed by poorly managed clearing houses, Bailey proposed several measures:

1. Strengthening global standards: Enhancing international regulatory standards for clearing houses will help ensure their safety and stability.
2. Promoting cooperation: Encouraging strong coordination and cooperation among interested countries will facilitate the effective implementation of these standards.
3. Articulating common objectives: Clearly defining a common public policy objective for financial stability will help guide international efforts in managing clearing house risks.

Bailey's perspective on clearing houses aligns with the Bank of England's macro-prudential approach to financial stability. This approach focuses on risks that could threaten the system as a whole, taking into account correlations, concentrations, interconnectedness, and opacity.

In conclusion, Bailey's warning about clearing houses underscores the importance of robust global standards and international cooperation in mitigating the risks posed by poorly managed clearing houses. By implementing the proposed measures, the financial community can enhance the safety and stability of these critical market infrastructures, ultimately promoting financial stability and market functionality.