By Huw Jones
LONDON (Reuters) - Regulators must equip themselves with tools such as "bail-in" bonds to deal quickly with a failed clearing house for stocks, bonds or derivatives without having to call on taxpayers for cash, the G20's risk watchdog said on Thursday.
After the global financial crisis of 2007-09, regulators mandated clearing for a wider range of derivatives, meaning they must pass through a clearer backed by a default fund to ensure completion of trades.
More recently, the United States has adopted rules to force more trades in the $26 trillion U.S. Treasury market through clearers.
As a result of such changes, some clearers have become vital to financial systems in more than one jurisdiction, meaning their failure could damage financial stability unless they can be stabilised or "resolved", meaning closed down, in an orderly way.
The Financial Stability Board (FSB) said its new standard, which builds on previous guidance, requires that adequate liquidity, loss-absorbing, and recapitalisation resources and tools are available to maintain the continuity of a clearer's critical functions, and mitigate adverse effects on financial stability should a shutdown become necessary.
It sets out seven resources and tools that regulators are required to pick from, such as "bail-in" bonds issued by clearers that can be written down to plug losses, resolution funds, cash calls during resolution, and equity in a first-loss position in resolution.
Regulators will have to state publicly which tools they have selected. Laws could need changing or introducing in some countries to give regulators access to such tools.
"Temporary public funding for liquidity ... should be relied on only as a last resort," the FSB said.
Exchanges such as LSEG, ICE (NYSE:ICE), CME and Deutsche Boerse (ETR:DB1Gn) all operate major clearing houses that handle trades totalling trillions of dollars.
The G20 economies commit to applying regulatory recommendations from the FSB, and the watchdog said it would monitor implementation and publish its findings.