November 16, 2016
Washington, DC — The Staff of the U.S. Commodity Futures Trading Commission (CFTC) today issued a report detailing the results of a supervisory stress test of major clearinghouses. 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 included five clearinghouses registered with the CFTC located in the United States as well as in the U.K.: CME Clearing, ICE Clear Credit, ICE Clear Europe, ICE Clear U.S., and LCH Clearnet. It encompassed cleared futures and options, interest rate swaps, and credit default swaps.
The analysis included the largest clearing members (measured by margin deposited) at each clearinghouse. 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 analyzed.
“Following the financial crisis of 2008, central clearing of standardized 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.” said CFTC Chairman Timothy Massad. “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,” Massad continued. “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% of the total margin held by these clearinghouses. Staff provided the clearinghouses an opportunity to comment on the methodology and results.
The following are the key findings:
1. 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.
2. 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.
3. Clearing member risk was also diversified across the scenarios. No single scenario accounted for more than 19% of the worst outcomes. Of the 11 scenarios applied in the test, ten 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% of the tests.
The test does not cover other types of risks that clearinghouses face, such as liquidity risk, operational risk or cyber risk.
This is the first stress test that the CFTC has performed across multiple clearinghouses. Such tests will be a regular part of the CFTC’s risk surveillance program going forward. Staff has identified enhancements that can be incorporated into future exercises.
Supervisory stress tests are just one element of the CFTC’s program of oversight of clearinghouses. Staff performs daily risk surveillance of individual clearinghouses, clearing members, and large market participants. Staff performs periodic compliance exams of clearinghouses. Staff reviews clearinghouse rules, including rules relating to margin and risk management procedures, for compliance with statutory requirements. Staff also develops and implements regulatory standards for clearinghouses and their members. CFTC staff also participates in or leads several domestic and international regulatory initiatives related to clearinghouse strength and stability.
Last Updated: November 16, 2016