Clearinghouses used for derivatives trades can be vulnerable andpotentially spread risks through the financial system, according toa U.S. Treasury report.

The Treasury's Office of Financial Research (OFR) said Wednesdaythat threats to stability have increased slightly in the past year.Its assessment of risks in the financial system, however, hasn'tbeen affected by the FederalReserve's decision to raise interest rates in December. TheFed's monetary policy makers decided Wednesday to leave ratesunchanged following a two-day meeting in Washington.

Clearing trades at a central location, rather than betweendealers or between dealers and clients, helps reduce the likelihoodof counterparties defaulting, but clearinghouses can lead tosystemic risks if they don't have sufficient resources tocover payments, or margin, according to the research office'sfourth annual report.

Regulators including Thomas Hoenig, vice chairman of the FederalDeposit Insurance Corp., and firms such as asset manager BlackRockInc. have raised concerns that there could be too much riskconcentrated at clearinghouses.

U.S. officials turned to clearing firms after the 2008 crisis tohelp make the derivatives market more transparent. One objectivewas to ensure that losses at one financial company wouldn't spreadto others and the broader economy. Swaps trading—when it waslargely unregulated—amplified the meltdown and prompted a US$182billion rescue of American International Group Inc.

After the crisis, authorities in U.S., Europe, and Asiarequired that most derivatives be guaranteed at clearinghousesinstead of allowing risks to mount directly—and unseen—betweentraders. That move increased the role of platforms owned by CMEGroup Inc., Intercontinental Exchange Inc., and LCH.Clearnet GroupLtd., where traders clear swaps tied to interest rates, bonds, andother assets.

The report also raised other concerns, such as that U.S. bankingactivity remains concentrated among eight global banks that havebeen labeled systemically important—including Citigroup Inc., Bankof America Corp., Goldman Sachs Group Inc., and Morgan Stanley. TheOFR conducts research for regulators and works closely with theFinancial Stability Oversight Council, a group of U.S. financialregulators led by Treasury Secretary Jacob J. Lew.

Overall, threats to financial stability still remain in themedium, or moderate range, the OFR said. The office reiteratedregulators' concerns over the past several years about incentivescreated by low interest rates.

“Persistently low rates will continue to prompt investors totake higher risks to increase their returns on investment and mayencourage excessive borrowing,” according to the report.

The OFR said that reaching for yield along with vulnerabilitiesfrom heavy debt loads and eroding credit quality in emergingmarkets will increase the U.S. financial system's susceptibility toshocks.

Rapid, sharp declines in market liquidity could also pose athreat to financial stability, the research unit said. Regulatorsare studying ways in which they can prevent that to help the U.S.Treasury market operate more smoothly. They want to avoid the kindof sudden price swings that occurred on Oct. 15, 2014, whenTreasury yields fluctuated in a way that had only happened threeother times since 1998.

–With assistance from Jesse Hamilton and Silla Brush.

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