Rules under consideration by federal regulators could require clearinghouses to back up Treasuries pledged as collateral in the $693 trillion over-the-counter (OTC) derivatives market with credit lines, according to industry executives.
The Commodity Futures Trading Commission (CFTC), moving to toughen safeguards in a market blamed for worsening the credit crisis, is weighing a regulation that would mandate Treasury collateral be subject to a "prearranged and highly reliable funding arrangement," according to documents on its website. Federal Reserve officials told banks and exchanges that the language means bonds must be covered by credit lines, according to three industry executives briefed on the matter.
"CME estimates that liquidity facility costs would approximately double" if the rule is passed, according to a letter that CME Group Inc., owner of the Chicago Mercantile Exchange, sent to the CFTC. "These increased costs would likely either be passed on to end customers or cause many clearing members to exit the customer clearing business entirely."
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