OFR_2016_Financial-Stability-Report

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48 2016 | OFR Financial Stability Report Cyber incidents are a growing strategic challenge to financial firms and the financial system. Awareness of the issue influences risk management. However, as large firms pay more attention to security, risks may move toward smaller firms or firms beyond the reach of U.S. supervisors. Such firms may have fewer resources to fight threats. They may operate in jurisdictions with less rigorous regulatory oversight. There have been tests of industry-wide capabilities in information sharing, business continuity, and disaster recovery, including exercises such as the Quantum Dawn series. Regulators and the industry need to continue to work together to enhance security, improve network resilience, and increase the capacity to recover.
2.4 Central Counterparties as Contagion Channels The growing role of central counterparties (CCPs) in financial markets will improve market efficiency, transparency, and financial stability, but will also concentrate risks. Distress at a CCP could impose losses on its clearing members, which include the largest and most interconnected financial institutions. New public data releases and stress test results in 2016 shed light on the potential for a distressed CCP to transmit financial instability. Since the financial crisis, regulators across the world have worked to move derivatives from bilateral transactions to central clearing through CCPs. The use of CCPs promotes product standardization and greater transparency. The role of CCPs in clearing derivatives transactions has grown greatly since the crisis. About 75 percent of transactions in swap markets supervised by the CFTC are now centrally cleared. That is up from about 15 percent in 2007 (see Massad, 2016). Swaps markets now clear 97 percent of new trans - actions in forward rate agreements and 89 percent in fixed-float interest rate swaps (see CFTC, 2016b). Derivatives CCPs reduce counterparty credit risk in over-the-counter (OTC) derivatives markets, reducing some of the financial stability risks of bilateral trading. CCPs could lower trading costs, improve price discovery, and reduce counterparty exposures through multilateral netting. However, in the process, CCPs will also concentrate counterparty default risk. For this reason, if not well managed, they may pose systemic risks. To address these risks, supervisors have coordinated and introduced international risk management standards for CCPs and other financial market infrastructures. As reliance on central clearing grows, the risk management practices and regulation of CCPs become more important. A CCP is vulnerable to the default of its clearing members. Clearing members are typically large and interconnected banks acting as dealers and clearing agents for many clients. CCPs manage risks through collateral requirements, membership standards, close surveillance of members, and legal procedures to address any default by clearing members. If CCP risk management proves inadequate, a distressed CCP may impose losses directly on remaining clearing members. A distressed CCP could also affect markets indirectly. Unwinding of portfolios as part of default management, either through auctions or liquidation, may aggravate price volatility. New data that CCPs across the world began disclosing this year provide insights about CCP risks. The data are useful for sizing up the effects of CCPs on financial stability. Still, gaps remain. European supervisors also Distress at a CCP could impose losses on its clearing members, which include the largest and most interconnected financial institutions. New public data releases and stress test results in 2016 shed light on the potential for a distressed CCP to transmit financial instability. Key Threats to Financial Stability 49
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OFFICE OF FINANCIAL RESEARCH 2016 F
Page 5: Contents Executive Summary ........
Page 8 and 9: Chapter 2 provides deeper analysis
Page 10 and 11: of sharp decreases in U.S. equity a
Page 13 and 14: 1 Financial Stability Assessment Ov
Page 15 and 16: Figure 3. Real GDP Growth (year-ove
Page 17 and 18: Figure 8. Ten-Year U.S. Treasury Yi
Page 19 and 20: Monitoring Shadow Banking Risks The
Page 21 and 22: An earlier OFR paper proposed an ac
Page 23 and 24: Figure 17. Size, Liquidity, and Con
Page 25: Figure 19. Top Systemic Risk Scores
Page 28 and 29: The analysis pointed to seven key t
Page 30 and 31: could. In early 2016, investor conc
Page 32 and 33: earnings or share issuance. But red
Page 34 and 35: Fund Monitor, the OFR assessed expo
Page 36 and 37: 2.2 Risks in U.S. Nonfinancial Corp
Page 38 and 39: Figure 31. U.S. Nonfinancial Corpor
Page 40 and 41: Figure 36. U.S. Corporate Bond Defa
Page 42 and 43: Commercial Real Estate Prices Have
Page 44 and 45: 2.3 Cybersecurity Incidents Affecti
Page 46 and 47: Hackers Breach Bangladesh’s Centr
Page 48 and 49: Figure 42. Banks that Include an Op
Page 50 and 51: The industry is working with the pu
Page 52 and 53: Figure 46. U.S. Financial Regulator
Page 56 and 57: eleased the results of an unprecede
Page 58 and 59: Figure 49. CCP Default Waterfall ($
Page 60 and 61: Figure 50: CCP Ratios and Amounts f
Page 62 and 63: cause more-prudent CCPs to appear m
Page 64 and 65: 2.5 Pressure on U.S. Life Insurance
Page 66 and 67: The experience of Japan’s life in
Page 68 and 69: 2015). These benefits are effective
Page 70 and 71: Figure 55. Life Insurance Securitie
Page 72 and 73: Drivers of Insurers’ Systemic Ris
Page 74 and 75: 2.6 Systemic Footprints of Largest
Page 76 and 77: Interest Rates and Derivatives Expo
Page 78 and 79: Figure 63. Components of U.S. G-SIB
Page 80 and 81: Figure 66. Five-Year Changes to G-S
Page 82 and 83: 2.7 Deficiencies in Data and Data M
Page 84 and 85: Figure 68. Examples of Key Post-Cri
Page 86 and 87: Broader Adoption of Data Standards
Page 88 and 89: Better Regulatory Sharing Needed Th
Page 90 and 91: The U.S. Census Bureau surveys publ
Page 92 and 93: The group will also consider how th
Page 94 and 95: and contracts would be crucial. The
Page 96 and 97: Figure 72. Scaling of Data Validati
Page 99 and 100: Glossary 10-Year, 10-Year Forward R
Page 101 and 102: Conditional Value-at-Risk (CoVaR) C
Page 103 and 104: Fire Sale Form N-MFP Form PF Fundin
Page 105 and 106:
Liquidity Risk Liquidity Transforma
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Pension Funded Ratio Pension Risk T
Page 109 and 110:
Stress Test Supplemental Leverage R
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Bibliography Adrian, Tobias, and Ma
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Board of Governors of the Federal R
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www.richmondfed.org/~/media/richmon
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Her Majesty’s Government and Mars
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Paul, Ruma. “Bangladesh hopes to
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Zetter, Kim. “That Insane, 18M Ba
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