The World Federation of Exchanges (WFE) on Wednesday responded to the CPMI-IOSCO Framework for Supervisory Stress Testing (“SST”) of Central Counterparties (“CCPs”).
According to WFE, the purpose of the Framework is to guide global securities regulators as they collaborate on SSTs to observe the systemic effect of market stress on multiple CCPs across jurisdictions. The WFE has welcomed this initiative as an important tool for macro-prudential economic analysis.
It explained that CCPs have played an important role in ensuring the stability of the financial system during and since the global financial crisis. They will have an increasingly positive impact on markets as more financial instruments are centrally cleared.
In response to the consultation, the WFE made a number of points:
There are areas of concern around information sharing and issues of confidentiality, particularly for multi-jurisdictional stress testing; regulators can address these issues through engagement with their counterparts, market infrastructure operators and market participants.
The WFE cautions against taking a one-size-fits-all stress test approach. As CPMI-IOSCO rightly recognises, not all aspects of a stress test will be relevant depending on the jurisdiction/market structure in which the CCP operates. The WFE considers it preferable to have a small suite of stress tests to reflect the diversity within the CCP ecosystem.
The WFE believes the value of multi-jurisdictional stress tests sits at the macro-prudential level, and as such, it is encouraged by the focus on macro-prudential stress scenarios and impacts, which should supplement the more targeted stress tests performed by each CCP.
Authorities should seek the expertise and input of CCPs when designing the stress tests to ensure their relevance and that the scenarios are indeed plausible.
Nandini Sukumar, Chief Executive Officer, The WFE said: “The WFE and its members are committed to ensuring their trading and clearing environments are secure, stable and resilient. We welcome international efforts to understand the macro-prudential risks in the global economy. The WFE and its members – via its dedicated post-trade working group of CCP technologists and risk specialists – are keen to continue working with international authorities to ensure that our financial markets are empowered to finance the economy, mitigate risk and serve investors.”
