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Supervisory Stress Testing For CCPs : A Macro-Prudential, Two-Tier Approach

Author

Listed:
  • Edward L. Anderson
  • Fernando Cerezetti
  • Mark Manning
Abstract
Stress testing has become an increasingly important mechanism to support a variety of financial stability objectives. Stress tests can be used to test the individual resilience of a single entity or to assess the system-wide vulnerabilities of a network. This article examines the role of supervisory stress testing of central counterparties (CCPs), which has emerged in recent years. A key message is that crucial differences in CCPs? role, risk profile and financial structure, when compared to banks, are likely to require significant adaptation in the design of supervisory stress tests (SSTs). We examine how supervisory stress tests may be designed to complement CCPs' own daily stress tests, and argue that macro-prudential supervisory stress testing of CCPs is valuable for both authorities and market participants. The paper offers practical guidance on the implementation of the exercises and proposes some specific design principles that should allow authorities to extract more information from such tests. We propose a two-tier approach that meets the intended policy objectives, while balancing ambition and resource cost. The first tier encompasses more standardized tests that can be conducted frequently to assess the resilience of the clearing network over time. The second tier encompasses less frequent and more complex 'deep dive' assessments. The proposed approach should overcome operational and resource challenges, which to date, may have inhibited the widespread application of supervisory stress testing.

Suggested Citation

  • Edward L. Anderson & Fernando Cerezetti & Mark Manning, 2018. "Supervisory Stress Testing For CCPs : A Macro-Prudential, Two-Tier Approach," Finance and Economics Discussion Series 2018-082, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2018-82
    DOI: 10.17016/FEDS.2018.082
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    References listed on IDEAS

    as
    1. Robert Cox & Robert Steigerwald, 2017. "A CCP Is a CCP Is a CCP," Policy Discussion Paper Series 93561, Federal Reserve Bank of Chicago.
    2. Jorge Cruz Lopez & Mark Manning, 2017. "Who Pays? CCP Resource Provision in the Post-Pittsburgh World," Discussion Papers 17-17, Bank of Canada.
    3. S Battiston & G di Iasio & L Infante & F Pierobon, 2015. "Capital and contagion in financial networks," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Indicators to support monetary and financial stability analysis: data sources and statistical methodologies, volume 39, Bank for International Settlements.
    4. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    5. Stefan Avdjiev & Patrick McGuire & Philip Wooldridge, 2015. "Enhanced data to analyse international banking," BIS Quarterly Review, Bank for International Settlements, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Central counterparties; Financial regulation; macroprudential policy; Stress testing;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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