Allowing swaps clearinghouses to turn to central banks for the same kind of emergency loans that banks can access would add to financial stability in important ways, Chicago Federal Reserve President Charles Evans said on Tuesday in Shanghai.
Since the financial crisis, regulators in the United States and elsewhere have forced much of the world’s nearly $500-trillion swaps market into centralized clearinghouses, seen as safer than the unregulated trader-to-trader market.
But regulators worry that concentrating risk in this way means that the failure of a clearinghouse could have a major impact on the broader financial market, and they are seeking ways to minimize spillovers during times of financial stress.
Giving central banks the ability to provide emergency liquidity lines to clearinghouses would be an important step in that direction, Evans said in remarks prepared for delivery to the Symposium on OTC Derivatives.
During the financial crisis, the Fed’s ability to