The Federal Reserve is ready to take steps to ensure financial stability after officials cited high-speed trading and clearing-house operatios as potential threats.
Chairman Janet Yellen said regulators will work with other regulators to evaluate whether rules and risk-management practices are strong enough, Blomberg reported Wednesday
Yellen zeroed in on clearing houses, platforms where swaps transactions are cleared and settled, in aspeech to the Financial Stability Oversight Council (SFOC).
“We also are evaluating how banks are managing their exposures” to central clearing parties, Yellen said.
“We’re prepared to take steps to strengthen standards to promote financial stability if needed.”
Financial firms including JPMorgan Chase & Co. and BlackRock Inc. said reliance on clearing houses shifts risks to a handful of entities and the collapse of one could lead to big losses for banks.
The FSOC, which monitors potential threats to financial stability, reiterated in its annual report regulators’ concerns about cyber security and companies taking too much risk to compensate for near-zero interest rates.
The council said regulators are continuing to review events that shook financial markets in October and will release in the coming weeks a paper analyzing the volatility.
While changes in market structure “such as the ability to trade at higher speeds” have increased competition and reduced transaction costs, the growth of electronic trading “should be assessed for potential vulnerabilities”, according to the FSOC report.
The council said officials need to better understand firms that are not regulated and links between different financial markets, and should make recommendations to Congress to close any “regulatory gaps.”
The report, the FSOC’s fifth since it was created by the 2010 Dodd-Frank law, details the potential threats regulators are monitoring, including global economic shocks, financial innovation, short-term wholesale funding and risk-taking incentives at large firms.
The panel’s chairman is Treasury Secretary Jacob J. Lew and its 10 voting members include Yellen and Securities and Exchange Commission Chair Mary Jo White.
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