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January 25, 2012

CCP Stress Tests

The European Association of Clearing Houses (EACH, here) has published a recommended set of stress tests for CCPs, in this PDF. They break down into the following areas:

  1. Market events: Three suggested approaches 1) historical simulation 2) Economic story lines 3) Statistical methods such as Extreme Value Theory
  2. Member correlation: How many members will simultaneously be put in default
  3. Close out periods and methods
  4. Whether affiliates default at the same time – I think this is getting at client clearing / indirect members
  5. Liquidity testing – given the underpinnings of a CCP, including credit lines, Repo facilities, secured and unsecured borrowing facilities
  6. Member fire-drills to ensure they are prepared for such an event, where it directly requires their involvement

The paper recommends performing stress testing on a daily basis with full review of the results. It also recommends that:

  • Senior management, the Risk Committee and the Board should be fully informed of the performed stress testing, adequacy of financial resources and actions taken.

Plenty of motherhood and apple pie thrown in covering record keeping, reviews and governance. I wonder how closely the CCPs below meet these recommendations?

The EACH membership who (I assume) endorse the paper include:

  1. CC&G (Cassa di Compensazione e Garanzia S.p.A.)
  2. CCP Austria
  3. CME Clearing Europe
  4. CSD and CH of Serbia
  5. ECC (European Commodity Clearing AG)
  6. EMCF (European Multilateral Clearing Facility)
  7. Eurex Clearing AG
  8. EuroCCP (European Central Counterparty Ltd)
  9. HELEX AS
  10. ICE Clear Europe
  11. IRGiT S.A. (Warsaw Commodity Clearing House)
  12. KDPW_CCP S.A.
  13. KELER CCP Ltd
  14. LCH.Clearnet Ltd
  15. LCH.Clearnet SA
  16. MEFF
  17. NASDAQ OMX
  18. National Clearing Centre (NCC)
  19. NOS Clearing ASA
  20. NYSE Liffe
  21. OMIClear
  22. Oslo Clearing ASA
  23. SIX x-clear AG

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