• US, EU clearinghouse stress tests in `infancy,’ need broadening, Fed working paper says
    13 December 2018
    US and European authorities’ stress tests of derivative clearinghouses should be conducted more often and substantially broadened to cover more jurisdictions, banks and risk scenarios, a US Federal Reserve staff working paper said.

    The changes are needed if the tests are to capture the impact of bank or clearinghouse collapses on the global financial system, said analysts with the Fed, the UK’s Financial Conduct Authority and an Intercontinental Exchange clearinghouse.

    US and European regulators’ testing “is in its infancy,” the analysts said in the paper, posted earlier this month. “There is substantial scope to better understand the implications of system-wide stress shocks,” they wrote.

    The US Commodity Futures Trading Commission and the European Securities and Markets Authority have each conducted two systemic exercises since 2016 to complement stress tests conducted by individual clearinghouses.

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  • SEC looking at risks posed by boom in lowest-rated investment-grade bonds
    12 December 2018
    The US Securities and Exchange Commission is examining the systemic impact that an economic downturn could have on the high-flying market in the lowest-rated investment-grade bonds, a concern raised by the US Federal Reserve last month.

    SEC Chairman Jay Clayton said a key question is whether a downgrade in these corporate bond ratings to junk status could spur a wave of attempted sell-offs by bondholders such as mutual and pension funds. These sales efforts might prove fruitless, he said.

    “One thing that we’re looking at in particular is, will the change in ratings for these types of securities trigger substantial selling that wouldn’t be picked up by ordinarily expected demand,” he told the Senate Banking Committee yesterday.

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  • Global authority warns of possible market 'contagion' from ETF price drops
    11 December 2018
    Regulators should monitor whether exchange-traded funds’ susceptibility to sell-offs ignites volatility in underlying stocks, bonds and commodities, said Agustin Carstens, general manager of the Bank for International Settlements.

    He said money managers faced with a plunge in ETFs that are invested in an asset market that is illiquid — such as corporate or emerging market economy bonds — might have to unload other assets that can be sold quickly without large losses.

    This chain of events “would give rise to contagion,” said Carstens, who heads the umbrella group for the world’s central banks. “As securities markets become choppier, we will need to be on the lookout for ETFs possibly accentuating the volatility of the underlying asset market or its surrogates".

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  • Fed looking to improve stress tests by including system-wide exercises
    10 December 2018
    The US Federal Reserve is researching ways to improve stress tests by incorporating the impact of a shock on the financial system as a whole rather than on an individual bank alone, Fed Governor Lael Brainard said.

    The United States trails authorities in the euro area, Japan and Switzerland in running system-wide, or “macroprudential,” exercises, a Bank for International Settlements unit said last month.

    Brainard said the Fed is experimenting with ways to look at “second-round” waves of a shock that has caused not only direct losses to a bank but also stress to other firms and markets.

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  • Fed official urges flexible approach to cybersecurity for financial utilities
    07 December 2018
    National and global regulators should avoid rigid approaches to cybersecurity for financial market utilities such as CME Group, CHIPS and Depository Trust, a senior official with the US Federal Reserve Bank of New York said.

    “I will state my fear plainly: beware the risk management industrial complex,” Richard Dzina, executive vice president of the New York Fed’s financial services group, said in a speech* to bankers posted today.

    “Let us be sure not to construct an inflexible Maginot line whose rigidities are easily subverted by a creative and nimble adversary. Compliance across this waterfront has become a consuming pre-occupation”.

    Dzina called instead for “autonomy and discretion” to be granted to local management to develop a “tailored” approach that balances a particular firm’s needs with accountability.

    *2018 Annual Conference. The Clearing House and Bank Policy Institute. New York. Nov. 26, 2018.

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