OFR_2016_Financial-Stability-Report

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cause more-prudent CCPs to appear more precariously positioned than less-prudent CCPs. Regulators Conduct Stress Tests Clearing members and regulators can use stress tests to evaluate the vulnerability of CCPs and the potential systemic impacts of a distressed CCP. Disclosure of stress test results helps the public assess the resilience of CCPs. Although stress tests use confidential data, publishing the results of stress tests need not violate confidentiality. In April 2016, European regulators published results of the first market-wide stress test of European CCPs (see ESMA, 2015). The tests used data from the CCPs for three days in the fourth quarter of 2014. The results included a description of the methodology and “reverse stress tests.” The reverse tests described the number of clearing member failures that would be required to exhaust the prefunded amount and callable resources of a CCP. The stress test focused on counterparty credit risk. It did not consider liquidity, operational risk, or reinvestment risk. The test identified potential shortcomings. The report on the results also made recommendations to national supervisors. The stress test involved 17 CCPs in the EU that clear securities or derivatives, including the European subsidiaries of U.S.-based CME, ICE, and Nasdaq. Together, the CCPs had more than 900 clearing members. Thirteen consolidated financial firms belonged to more than 10 CCPs. The methodology differs from stress testing of large banks in that it reflects the network effects between CCPs and their clearing members. The network of clearing members can be stressed only if two things happen at the same time. First, common exposures result in a sharp loss in value on broad classes of assets. Second, at the same time, there is a failure of particular clearing members whose credit risks had been mutualized through the guarantee fund and callable obligations to the CCPs. In the EU stress test, 74 percent of default resources among all 17 CCPs came from margin or collateral. About 17 percent came from callable assessments on clearing members, followed by 9 percent from paid-in guarantee fund contributions, and 0.2 percent from the CCPs’ own equity. These proportions suggest that default waterfalls of EU CCPs are similar to those of U.S. CCPs, based on the quantitative disclosures. The stress test results also provided information about concentration in CCPs. The test found that the largest 10 clearing members accounted for 50 percent of all the paid-in guarantee fund contributions in the system. The report concluded that individual CCPs face higher degrees of concentration than the system as a whole. The reverse stress test showed that the system could absorb the largest 10 clearing member failures with no shortfall in total resources and a €100 million ($112 million) shortfall in prefunded resources. A breach in excess of €100 million would occur after the four largest clearing members at each CCP failed. The report also included a more severe stress scenario in which every CCP’s two largest clearing members failed at the same time. The severe test showed a shortfall in prefunded resources. The shortfall reached €10 billion ($11 billion), and then increased to €40 billion ($45 billion) when up to 10 clearing members defaulted under other, harsher scenarios defined by larger asset price movements and default frequencies. The report concluded that even under extreme stress scenarios, there would be no uncovered losses and the maximum amount of assessments beyond the guarantee fund would be €1.9 billion ($2.1 billion). This first EU-wide stress test represents a clear advance in assessing stability in financial market infrastructure. Limitations, mentioned in the report, include the small number of days during which the exposures were measured and stressed, as well as the sole focus on credit risk to the exclusion of liquidity, operational, and other risks. The stress scenarios did not include the dynamic effect of a change in market exposures from increased market volatility that might precede the failure of one or more large clearing members. In November 2016, the CFTC published the results of a joint stress test of the five largest CCPs registered with the agency: CME Clearing, ICE Clear Credit, 56 2016 | OFR Financial Stability Report
ICE Clear Europe, ICE Clear U.S., and LCH.Clearnet Limited. The test used data from April 29, 2016, and included the 15 largest clearing members and their affiliates at each CCP. The CFTC developed a set of stressful scenarios based on price changes and correlations across markets that occurred on days of extreme volatility, including the day of the Lehman Brothers collapse and the day after the Brexit vote. Futures, options on futures, and swaps, both on financial contracts and on physical commodities, are cleared in these CCPs. The stress test studied the sufficiency of CCP prepaid funds, assuming that no additional resources would be available from clearing members. It showed that under all scenarios, CCPs had sufficient prepaid funds to withstand losses to the two clearing members with the biggest exposures in every scenario. The stress test showed that clearing members are diversified across CCPs — clearing members do not face simultaneous losses across all CCPs in any scenario. The stress test also showed that the clearing member with the largest exposure varied across scenarios. The CFTC stress test shares the limitations of the ESMA stress test, but improves upon it by considering a larger number of scenarios. Reporting the results of the stress test helps the public assess the vulnerability to interconnected losses through multiple CCP clearing memberships. The systemwide stress tests conducted by ESMA and the CFTC in 2016 present a road map for the future. Expanding them across CCP supervisors in the United States, and potentially across jurisdictions across the world, would require cooperation. Carrying out and publicly reporting the results of such tests would have the potential benefit of boosting market confidence in the resilience of the global financial system. Supervisors have access to data that allow them to evaluate the resources of CCPs. The new CCP disclosures enhance the capacity of market participants to assess the resilience of the market infrastructure. Still, the data are too aggregated to conduct robust analyses of CCP concentration risks. Conclusion: New Data and Stress Tests Provide Valuable Insights, but More Is Needed Supervisors have access to data that allow them to evaluate the resources of CCPs. The new CCP disclosures enhance the capacity of market participants to assess the resilience of the market infrastructure. Still, the data are too aggregated to conduct robust analyses of CCP concentration risks. They do not include enough information about the sum of exposures and the sensitivity to market prices that would support a more complete stability assessment. More consistent data are also needed. Key Threats to Financial Stability 57
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OFFICE OF FINANCIAL RESEARCH 2016 F
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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 54 and 55: 48 2016 | OFR Financial Stability R
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 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
Page 107 and 108: Pension Funded Ratio Pension Risk T
Page 109 and 110: Stress Test Supplemental Leverage R
Page 111 and 112: 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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