LCH.Clearnet has outlined its suggestions for a stress-testing framework for central counterparties (CCPs), identifying three key principles for the tests: transparency, simplicity and comparability.
In a white paper, LCH.Clearnet recommends a standardised stress testing methodology in order to improve transparency in risk management, and will allow clearing members and regulators to easily compare CCPs.
A standardised method could also help to create a more level playing field, making evaluation easier across different regulatory requirements and jurisdictions. A simple and consistent measure will help to create a single, understandable network, where the only variable in the results will be the robustness of the resources at the clearing house.
According to the paper, clients should be as aware as possible of the risk drivers, while complex risks should be communicated as clearly as possible. It is also important that the methodology not only allows, but also encourages comparison across CCPs, regardless of the value of pre-funded resources.
LCH.Clearnet advised that historical and hypothetical stress scenarios, as well as de-correlation stress scenarios; those that break with historic correlations, with the effect of potentially revealing unexpected risks. It also suggested combining scenarios for the most comprehensive test environment.
The white paper comes as the use of CCPs is set to become mandatory in G20 nations, and after an announcement Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) that they will be reviewing stress testing in CCPs.
Finally, it encouraged debate within the clearing community as the CPMI-IOSCO stress testing review gets underway, suggesting that this will be a major step towards crafting a transparent clearing landscape around the world.
