8 tagged as potential threats to financial system

[July 19, 2012]  WASHINGTON (AP) -- Federal regulators have tagged eight exchanges and clearinghouses that settle trades as potential threats to the stability of the financial system that need strict government oversight.

They include the Chicago Mercantile Exchange, the Depository Trust Co., the National Securities Clearing Corp. and the Options Clearing Corp.

The announcement was made Wednesday by the Financial Stability Oversight Council, a group of the top regulators that includes Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke. The action was mandated by the 2010 financial overhaul law.

The agencies that regulate the exchanges and clearinghouses will set rules for them to manage risks.

The move came as the oversight group issued an annual report that identifies the European debt crisis, weak economic growth around the world and U.S. money-market mutual funds as risks to U.S. financial stability.

Weaknesses in money-market funds were exposed when a large fund collapsed in 2008 during the financial crisis. That created a scare that led the government to temporarily guarantee money fund assets so investors could be assured they'd be protected from losses.

Mary Schapiro, chairman of the Securities and Exchange Commission, is seeking changes in the way the funds operate but her proposals have met with objections from the mutual fund industry.

The report said that in the four years since the crisis, the U.S. financial system has been made more resilient with requirements for banks and other institutions to follow the overhaul law.

But the report says, "There is still work to be done to address structural vulnerabilities within the financial system itself."

Geithner, who heads the oversight council, said at a meeting of the group Wednesday that if a reminder is needed of the importance of the regulatory changes, "then take a moment to reflect on the number of people still out of work, at risk of losing their home or struggling to finance a growing small business."

Other reminders, he said, are the recent failures of brokerage firms MF Global and Peregrine Financial, the nearly $6 billion trading loss at No. 1 U.S. bank JPMorgan Chase & Co., and abuses involving the setting of a key global interest rate by major banks.

The clearinghouses fill a crucial role in the financial system because they act as intermediaries to settle billions of dollars in trades. A failure of one of them or disruption of its operations could reverberate through the financial system.

The Federal Reserve, the SEC and the Commodity Futures Trading Commission will set standards for the entities to reduce their risks.

Others named by the oversight council are the Clearing House Payments Co., CLS Bank International, Fixed Income Clearing Corp. and ICE Clear Credit LLC.

[Associated Press; By MARCY GORDON]

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