On May 1, the Commodity Futures Trading Commission’s Division of Clearing and Risk and Office of the Chief Economist jointly issued, CCP Supervisory Street Tests: Reverse Stress Test and Liquidation Stress Test (Stress Test), which is a two-part report covering the results of 1) a reverse stress test of central counterparties (CCPs) or clearinghouses resources; and 2) an analysis of stressed liquidation costs.
The purpose of the Stress Test was to identify combinations of market shocks and clearing member (CM) defaults which would consume pre-funded resources. The results of the Stress Test indicated that CME Clearing and LCH Ltd., the two tested CCPs, would have sufficient pre-funded resources to cover losses even if all CMs with losses defaulted under certain extreme historic 1-day scenarios. The Stress Test also evaluated whether sufficient pre-funded resources would have been available in the event that the actual costs of hedging and auctioning the portfolio of a defaulting member exceeded CCP estimates. Results suggested pre-funded resources would have been sufficient to cover extreme but plausible market losses plus liquidation expenses for two house accounts. Such resources were found to be sufficient even if the actual liquidation costs were double the amount of the liquidation margin add-on.
The results of the Stress Test are available here.