CFTC: 'too-big-to-fail' clearinghouses resilient to shocks
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By John McCrank
(Reuters) - The top five financial derivatives clearinghouses overseen by the U.S. Commodity Futures Trading Commission and deemed "too-big-to-fail" showed resiliency to market shocks in a series of stress tests, the regulator said on Wednesday.
Clearinghouses stand between two sides of a trade to ensure its completion even if one side goes bust, reducing the chances a default between two large institutions might cascade into multiple defaults.
A pillar of the 2010 Dodd-Frank Wall Street reform law was to reduce risk in the derivatives market by requiring many products to be routed through clearinghouses.
But that created the perception that regulators had just shifted the risk and created new systemic problems that could be exposed the next time extreme market conditions appear, CFTC Chairman Timothy Massad said at a press conference.
The stress tests looked at the hypothetical impact of certain volatile market conditions, such as the collapse of Lehman Brothers and the UK's vote to leave the European Union, across multiple clearinghouses and clearing member firms on the same date.
"Clearinghouses had the financial resources to withstand extreme market price changes across a wide range of products," Massad said of the futures, options on futures, and swaps clearinghouses tested.
The tests also showed that the positions of clearing members, which are mainly banks, were highly diversified across clearinghouses, reducing the risk of defaults, he said.
Clearing members are required to leave collateral with clearinghouses in case of a default, and if that collateral does not cover the losses, the clearinghouse also has capital on hand and as a guarantee fund to which all members contribute.
The clearinghouses tested were CME Group's CME Clearing; Intercontinental Exchange Inc's ICE Clear Credit, ICE Clear Europe, and ICE Clear U.S.; as well as LCH Clearnet.
The CFTC and the U.S. Securities and Exchange Commission police the clearinghouses and make sure they have enough resources to stay afloat.
Clearinghouses are already required to conduct daily stress tests to estimate potential losses under extreme market conditions. The tests are to determine if the clearinghouses have the financial resources to meet their obligations, and to evaluate exposures to individual clearing members.
The stress tests presented on Wednesday differed in that they looked at the impact across clearinghouses and their members, in the United States and abroad.
The European Securities and Markets Authority issued a report on its own stress test exercise in April and found European clearinghouses to be resilient, but said they must use tougher assumptions in their daily stress tests.
(Reporting by John McCrank; Editing by Chizu Nomiyama and Grant McCool)
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