Clearinghouse stress-test standards on horizon, officials say

10 June 2015. By Neil Roland.

Global authorities are likely to recommend minimum standards for clearinghouse stress tests, including greater transparency about testing methods, US and European regulators said.

Jeffrey Marquardt, a US Federal Reserve official, and Fabrizio Planta, a European Securities and Markets Authority official, said regulators are leaning toward new binding standards rather than a continuation of voluntary principles.

The Committee on Payments and Market Infrastructures (CPMI), joined by the International Organization of Securities Commissions (Iosco), started a review of clearinghouse stress tests in March.

“I believe the committee should produce a very strong document and should substantially move the dial on stress testing,” Marquardt, a Fed deputy director for bank operations and payment systems, said recently at a US Commodity Futures Trading Commission advisory committee meeting.* “That’s expected. We need to anticipate that will happen.”

ESMA post-trading team leader Planta, speaking at the same event in in Washington, DC, said, “We are encouraged that at the international level, we are now moving to a more granular definition of common stress-testing standards.”

Planta added, “Two issues: whether there should be common standards and whether there should be more transparency. The simple answers to those two questions are ‘yes’ and ‘yes.’ ”

Marquardt and Planta both represent agencies that play important CPMI and Iosco roles.

The two organizations, which formed a review panel in March, have been sending questionnaires to 30 clearinghouses asking about their testing practices.

CPMI and Iosco plan to seek public feedback next year in a consultation on how to improve the stress tests.

Not voluntary guidance

Marquardt and Planta said they preferred minimum standards over voluntary guidance about best practices at clearinghouses, also known as central counterparties (CCPs).

“There’s a lot of variation across these organizations, what they do, how much they do, how robust are the scenarios,” the Fed official said. “We need to enable comparisons of risks and strengths.”

Voluntary test methods that leave the approach up to individual clearinghouses would result in “distortions in risk and competition, probably reduced confidence in the CCPs, and even impacts on financial stability,” Marquardt said.

“We’re ready to revise our standards if something more granular comes out of this work,” said Planta. “We certainly believe this is the way forward for ensuring consistent standards globally.”

Transparent tests

Neither official went into detail about particular standards under consideration, other than transparency about testing methods.

They were joined in this observation by Robert Wasserman, a CFTC official on the CPMI-Iosco panel.

“It is well possible to come to an agreement on standards for stress testing, in particular areas like transparency where there seems to be lots of agreement,” he said at the meeting.

Among the leading clearinghouses that guarantee international derivatives trades are CME Group, Intercontinental Exchange and LCH.Clearnet.

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