The Committee on Payments and Market Infrastructures (“CPMI”) and IOSCO published revised guidance for regulators on designing and operating supervisory stress tests for central counterparties (“CCPs”).
The report, Framework for supervisory stress testing of central counterparties, provides a “non-prescriptive approach” to stress testing of CCPs. The framework is macroprudentially oriented; that is, it is intended to be used to analyze systemic effects of multiple CCPs responding to the same stress event(s). As previously covered, the CPMI and IOSCO requested feedback on an earlier draft, which informed this final version.
The report outlines the following:
- questions to consider before executing a supervisory stress test;
- establishing distinct roles and responsibilities for all participants;
- key elements for creating stress test scenarios;
- determining data needs and measures for data validation;
- applying risk exposures to scenarios and aggregating results; and
- using test results and adhering to disclosure requirements.
Lofchie Comment: The real question is not whether the CCPs can survive; the real question continues to be whether they can survive without bringing down their participants. The regulators need to expand their analysis to consider the risk that when the CCPs are in trouble, they will demand more capital and collateral from their participants, thereby sucking liquidity out of the system, and forcing a further selldown of the market as CCP participants liquidate customer and proprietary positions.