By Katy Burne
International market supervisors, moving to fortify so-called
"clearinghouses" that act as a key safety net for the financial
system, are taking lessons from bank stress tests, said people
familiar with the discussions.
Supervisors at the Bank for International Settlements' Committee
on Payments and Market Infrastructures and the International
Organization of Securities Commissions have been reaching out to
officials involved with bank stress tests to ask how similar
measures could work for their monitoring of clearinghouses, the
people said.
Conceived in 2009 by the Federal Reserve, the stress tests are
once-a-year snapshots of big banks' health, aimed at making sure
large lenders have enough capital to weather a market shock or
economic downturn. Supervisors want to make sure clearinghouses
that backstop large volumes of derivatives trades called swaps are
just as resilient.
Clearinghouses such as CME Group Inc. and LCH.Clearnet Group
Ltd. are supposed to help prevent a market-wide collapse by
ensuring either party in a swap would get paid if the other side
falters. Swaps allow users to hedge or speculate on moves in
everything from interest rates to the price of fuel.
International standards already require clearinghouses to carry
out routine and rigorous stress tests to gauge their likely
response in a range of hypothetical, extreme market scenarios.
Earlier this year, CPMI and IOSCO said they had begun reviewing
those internal tests, as part of their attempts to take stock of
how clearinghouse practices differ from company to company. They
have also been asking market participants for more information
about how the standards are being met, or to determine if more
guidance is needed.
The goal now is to make sure those clearinghouses have the
financial wherewithal to withstand severe market conditions, in
particular after postcrisis regulations have pushed waves of swaps
into clearinghouses that they previously didn't have to
process.
The moves to learn from bank stress testing come as J.P. Morgan
Chase & Co. and others have pushed clearinghouses to contribute
larger resources from their own coffers or "skin in the game" to
withstand a crisis, including a tumult caused by the default of its
member firms.
Regulators and industry professionals are quick to point out
that there are differences between bank and clearinghouse business
models that could make applying details of the bank stress tests to
clearers challenging.
"A level of standardization is possible, but context is required
around what each clearing house does, and how they risk manage and
protect themselves," said Daniel Maguire, global head of
clearinghouse operator LCH's SwapClear service and listed
rates.
Nonetheless, CMPI and IOSCO are reaching out to members of
clearinghouses and others with insight into bank stress testing
processes to see how those challenges may be overcome, according to
people involved with the clearinghouse reviews.
Routine and standardized stress testing, like in the case of
banks, is one possibility for clearinghouses, some of those people
said.
CPMI and IOSCO are both bodies that help to set standards across
global financial markets and work to promote the safety and
soundness of clearing and trading systems.
For a clearinghouse to exhaust all of its capital, prompting
regulators to step in, it would have to eat through all the cash
and assets it holds from a defaulting member firm, its own
contributions, a mutualized fund for covering defaults and other
layers of obligations in the so-called "waterfall."
Write to Katy Burne at katy.burne@wsj.com
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