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Major Clearinghouses Pass CFTC Stress Test; Post-Brexit Volatility Spurs Call for Collateral

The CFTC recently reported the results of a supervisory stress test conducted in April 2016 aimed at assessing the impact of hypothetical market scenarios across multiple clearinghouses and their clearing members. The analysis included five clearinghouses registered with the CFTC in the United States and the U.K.: CME Clearing, ICE Clear Credit, ICE Clear Europe, ICE Clear U.S., and LCH Clearnet. The stress test covered cleared futures and options, interest rate swaps, and credit default swaps and looked at whether actual margin amounts posted by clearing members, along with other pre-funded financial resources held by the clearinghouses, were sufficient to cover losses under a series of extreme stress conditions. CFTC Chairman Timothy Massad said that the first tests show that clearinghouses had ample resources to withstand extremely stressful market scenarios on the test date and that that risk was diversified across clearing members. The CFTC’s stress test does not cover other types of risks that clearinghouses face, such as liquidity risk, operational risk or cyber risk. Volatility continues to pose a major risk to clearinghouses. A Financial Times report in November showed that the five largest clearinghouses requested extra collateral to cover increased volatility after the United Kingdom voted to withdraw from the European Union. The report, citing CFTC data, stated that the clearinghouses demanded $27 billion in additional collateral across derivatives products on June 24, 2016, and that the total request was five times greater than the previous 12-month average.  According to the Financial Times, the CFTC’s April stress test only assessed a clearinghouse’s ability to withstand losses given its current resources, so even if the $27 billion requested after the Brexit vote had not been paid, a clearinghouse still would have passed the stress test.