INTERNATIONAL: IOSCO Release Draft Guidance for Supervisory Stress Testing of Central Counterparties

Thursday June 29 2017

Draft guidance for authorities on how to design and run supervisory stress tests for central counterparties (CCPs) was released on 28th June 2017 by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).

As a result of the Group of 20 (G20) derivatives reforms, and in particular the move towards central clearing of standardised over-the-counter derivative contracts, the role of CCPs in the financial system has gained in importance.

The consultative report, Framework for supervisory stress testing of central counterparties, provides a framework for authorities to evaluate the collective response of a set of CCPs to one or more financial stresses. In particular, conducting stress tests of this type could help authorities better understand the impact on the broader economy of a common stress event affecting multiple CCPs, as well as the implications of interdependencies between markets, CCPs, and other entities, such as liquidity providers and custodians.

The framework covers six components of a stress-testing exercise:

(i) setting the purpose and exercise specifications;

(ii) establishing governance arrangements;

(iii) developing stress scenarios;

(iv) collecting and protecting data;

(v) aggregating results and developing analytical metrics; and

(vi) determining the use of results and disclosure.

The components are intentionally broad and flexible to allow authorities to develop the most suitable approach for their circumstances. Authorities are encouraged, but not required, to use the framework as they deem appropriate.

Comments on the framework proposed in the report should be submitted by 22 September 2017. A cover note with details on the consultation process is attached to the consultative report.

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