LCH.Clearnet proposes stress testing framework
On March 30, LCH.Clearnet released a white paper on stress testing for central counterparties. LCH.Clearnet said it intends for the paper to inform efforts by international regulators to develop a standardized approach for stress testing, which would make it easier for regulators and clearing members to determine aggregate risk exposures and compare risk management procedures across CCPs.
The paper recommends that stress-testing methodologies should be based on three principles: transparency, simplicity and comparability. The paper also proposes a standard “framework” based on five basic elements, including the segregation of assets into different categories, the use of three types of scenarios and the evaluation of whether a defaulted member’s cleared positions can be successfully auctioned with out recourse to unfunded resources.
In a separate but related development, international regulators announced on March 11 that they are undertaking a review of stress testing by CCPs. The review will be conducted jointly by the Committee on Payments and Market Infrastructures, an international group of regulators working under the Bank for International Settlements and the International Organization of Securities Commissions. The regulators said the review will look at whether clearinghouses are implementing the stress testing standards contained in the Principles for Financial Market Infrastructures, which CPMI and IOSCO published in 2012.
