The US Commodity Futures Trading Commission (CFTC) has issued a report detailing the results of a supervisory stress test of five major clearinghouses based in the US and the UK, and the results for all five proved positive.
The purpose of the analysis was to assess the impact of a hypothetical set of extreme but plausible market scenarios across multiple clearinghouses and their clearing members.
The analysis, which covered CME Clearing, ICE Clear Credit, ICE Clear Europe, ICE Clear US, and LCH Clearnet, encompassed cleared futures and options, interest rate swaps, and credit default swaps, and found that clearinghouses had the pre-funded financial resources to withstand a variety of extreme market price changes across a wide range of products. The clearinghouses met or exceeded required resiliency levels.
In addition, the analysis showed that risk was diversified across the clearinghouses. Where a particular scenario was the worst for a clearing member at a particular clearinghouse, that clearing member generally did not incur margin shortfalls at all clearinghouses – and in many cases had margin surplus or even gains across all clearinghouses.
Clearing member risk was also diversified across the scenarios, with no single scenario accounting for more than 19 per cent of the worst outcomes. Of the 11 scenarios applied in the test, 10 different scenarios generated the worst outcome for someone, further indicating diversification rather than concentration. And no single clearing member had the largest loss in more than 16.6 per cent of the tests.
The analysis included the largest clearing members (measured by margin deposited) at each clearinghouse. And because many clearing members are among the largest at more than one clearinghouse, the exercise included a total of 23 corporate groups of clearing members. Both the house accounts and customer accounts of these clearing members were analysed.
“Following the financial crisis of 2008, central clearing of standardised swaps was rightfully agreed to by the G20 leaders, and mandated in the Dodd-Frank Wall Street Reform Act. That has made clearinghouses even more important in the global financial system. Therefore, we have been particularly focused on making sure that clearinghouses are safe and able to withstand highly stressful market conditions,” says CFTC chairman Timothy Massad (pictured). “These supervisory stress tests are an important new tool in this work. They enable us to assess the impact of stressful conditions across these clearinghouses and across the largest clearing members, and I thank our staff for the countless hours of work that went into this first set of tests.
“These first tests show that clearinghouses had ample resources to withstand extremely stressful market scenarios on the test date. They also show that risk was diversified across clearing members — a loss at one clearinghouse does not mean losses at all. These are very important findings in measuring the strength and resilience of clearinghouses.”
The test looks at whether actual margin amounts posted by clearing members, along with other pre-funded financial resources held by the clearinghouses, were sufficient to cover losses under a series of extreme stress scenarios applied to actual positions and financial resources.
CFTC staff designed and performed the exercise internally. It included eleven scenarios that were executed across the five clearinghouses and the 23 clearing members. It covered the most highly traded products at each clearinghouse. The products and clearing members covered represent 88 per cent of the total margin held by these clearinghouses. Staff provided the clearinghouses an opportunity to comment on the methodology and results.
The tests did not cover other types of risks that clearinghouses face, such as liquidity risk, operational risk or cyber risk.
