Supervisory Stress Testing for Ccps: A Macro-Prudential, Two-Tier Approach

26 Pages Posted: 10 Dec 2018 Last revised: 21 Feb 2019

See all articles by Edward Anderson

Edward Anderson

Board of Governors of the Federal Reserve System

Fernando Cerezetti

ICE Clear Europe Limited

Mark Manning

Financial Conduct Authority

Date Written: 2018-12-03

Abstract

Stress testing has become an increasingly important mechanism to support a variety of financial stability objectives. Stress tests can be used to test the individual resilience of a single entity or to assess the system-wide vulnerabilities of a network. This article examines the role of supervisory stress testing of central counterparties (CCPs), which has emerged in recent years. A key message is that crucial differences in CCPs’ role, risk profile and financial structure, when compared to banks, are likely to require significant adaptation in the design of supervisory stress tests (SSTs). We examine how supervisory stress tests may be designed to complement CCPs' own daily stress tests, and argue that macro-prudential supervisory stress testing of CCPs is valuable for both authorities and market participants. The paper offers practical guidance on the implementation of the exercises and proposes some specific design principles that should allow authorities to extract more information from such tests. We propose a two-tier approach that meets the intended policy objectives, while balancing ambition and resource cost. The first tier encompasses more standardized tests that can be conducted frequently to assess the resilience of the clearing network over time. The second tier encompasses less frequent and more complex 'deep dive' assessments. The proposed approach should overcome operational and resource challenges, which to date, may have inhibited the widespread application of supervisory stress testing.

Keywords: Central counterparties, Financial regulation, Macro-prudential policy, Stress testing

JEL Classification: G28, G02, G23

Suggested Citation

Anderson, Edward and Cerezetti, Fernando and Manning, Mark, Supervisory Stress Testing for Ccps: A Macro-Prudential, Two-Tier Approach (2018-12-03). FEDS Working Paper No. 2018-082. Available at SSRN: https://ssrn.com/abstract=3298003 or http://dx.doi.org/10.17016/FEDS.2018.082

Edward Anderson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Fernando Cerezetti

ICE Clear Europe Limited ( email )

United States

Mark Manning

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

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