The Commodities Futures Trading Commission (CFTC) has confirmed the stability of derivatives clearing firms, in the face of extreme market conditions, following eleven volatility simulations.
The CFTC report, Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, outlines the results of its fourth Supervisory Stress Test (SST) of derivatives clearing organisation (DCO) resources.
The report concluded that the DCOs studied hold “sufficient financial resources to withstand many extreme and often implausible price shocks”, even with multiple clearing member defaults.
Responding to the report, Jo Burnham, margin expert at OpenGamma, said: “This report highlights the resilience of derivatives clearing firms and the effectiveness of regulatory oversight in maintaining market stability during unpredictable times. Events like Covid-19, the invasion of Ukraine, as well as higher interest rates to curb inflation have tested the market’s response. It’s reassuring that, despite these highly improbable conditions, the market is much better equipped to handle significant disruptions, ensuring smooth functioning and investor protection.”
Conducted by the CFTC’s Risk Surveillance Branch of the Division of Clearing and Risk, the stress test was the most comprehensive to date, examining nine DCOs across futures and options, cleared interest rate swaps, credit default swaps, as well as foreign exchange (FX) products.
The test used actual positions as of 1 September 2023, and simulated eleven volatile dates since 2020, including market stresses from the COVID-19 pandemic, the war in Ukraine, and recent inflation-related impacts.
Key findings from the report showed that individual DCOs now have sufficient financial resources to withstand extreme market conditions, including highly implausible price shocks and multiple clearing member defaults. In some cases, DCOs could endure defaults of all clearing members affected by such shocks.
Even in the most extreme scenarios, the costs for non-defaulting members were minimal. For instance, in a scenario with shocks three times larger than the most volatile recent days and three synchronised defaults, the costs represented only 0.07% of the tier one capital of the parent companies of the affected clearing members.
The report also found that the interconnectedness among DCOs through clearing members had muted effects. Extreme events at one DCO did not typically cause extreme events at other DCOs, nor did significant losses for clearing members at one DCO severely impact their positions at other DCOs.
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