CFTC's clearinghouse stress tests reportedly beset by persistent troubles

The US Commodity Futures Trading Commission’s program of clearinghouse stress tests has shown little improvement since technical shortcomings, mismanagement “dysfunction” and public deception were flagged last year, an internal review has found.

“Substantive changes have been slow to materialize,” the CFTC’s inspector general said in his semi-annual report to Congress. “We also remain concerned that market participants may be given a misleading impression about the substantive quality and independence of CFTC’s stress-testing reports and capabilities.”

The inspectors said they were “disappointed” that mid-level CFTC officials found responsible for “mismanagement and dysfunction” last year remain part of the stress-testing program.

The report, released May 31, reserved judgment as to whether new leadership at the CFTC’s clearing and risk division and other changes “prove sufficient to address the deficiencies.”

A CFTC spokesman declined comment.

Earlier problems flagged

An inspector general report last year found that the stress-test model lacks “formal analysis, rule or objective metric” to guide the process. “Greater reliance on formal documentation and a consistent framework” would increase confidence in the program, it said.

The CFTC’s development of stress tests, the February 2018 report said, was set back by more than a year-and-a-half due to “bureaucratic territoriality” exercised by a former senior commission staffer.

He and his Chicago-based aides abruptly “shut down and abandoned” a technical unit’s more effective and independent testing tools, the report said.

The testing approach taken lacked the ability to incorporate widely traded uncleared swaps in a comprehensive model across asset classes, it said.

The Chicago-based staff gave “potentially misleading” communications about the progress and independence of the models to a public 2017 session of the agency’s market-risk advisory committee, the report said.

Many of the allegations were first reported by CFTC whistleblowers and brought to the attention of Chairman Christopher Giancarlo’s top aide in July 2017, an earlier report said.

Stress tests

The CFTC has been trying to develop stress tests to ward off the potential systemic impact of the collapse of a clearinghouse such as CME Group or Intercontinental Exchange.

The agency has conducted two system-wide exercises since 2016 to assess the resilience of the clearing network to unexpected shocks. These comprehensive exams are intended to complement stress tests by individual clearinghouses.

The tests covered three clearinghouses and looked at credit and liquidity risks. They didn’t address operational or cybersecurity risks, and were limited in their stress scenarios and products.

Giancarlo has said he expects to step down in mid-July and be replaced by Treasury official Heath Tarbert, who was confirmed by the Senate last week.

In September 2017, the agency got its first permanent clearing and risk chief, Brian Bussey, since October 2014.