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5 Major Clearinghouses Clear the U.S. CFTC Stress Test

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Major clearinghouses passed the supervisory stress test conducted by the U.S. Commodity Futures Trading Commission (CFTC). The test, which happens to be the first stress test conducted by the CFTC covering multiple clearinghouses, showed that “clearinghouses had ample resources to withstand extremely stressful market scenarios on the test date.”

The stress test was conducted on five clearinghouses that have been identified as systemically important by the Financial Stability Oversight Council (“FSOC”) – CME Group Inc.’s (CME - Free Report) CME Clearing, Intercontinental Exchange, Inc.’s (ICE - Free Report) ICE Clear Credit, ICE Clear Europe and ICE Clear U.S., and Europe-based LCH Clearnet.  Also, the test included 23 clearing members.


Clearinghouses, which serve as intermediaries between buyers and sellers of financial Instruments, have gained importance over the years particularly in the derivatives markets. In fact, post crisis, clearinghouses have become a more important part of the global financial system.

Markets witnessed how the extreme risk tied with the over-the-counter (OTC) swaps market intensified the crisis – particularly the huge losses suffered by the American International Group (AIG) in its portfolio of bilateral, uncleared swaps transactions.

In order to address the issue, in 2010, the Dodd Frank Wall Street Consumer Protection Act enacted reform in the OTC swaps market agreed by the G20 leaders. The reform authorized the CFTC to require certain swaps be cleared.

The latest CFTC report stated that as a result of the reform, the number of swaps cleared and the size of the corresponding payments and margin deposits at clearinghouses have increased considerably in recent years. Notably, since 2008, the total initial margin for cleared futures and swaps held by clearinghouses, which are registered with the CFTC, has more than tripled to over $300 billion.

Increasing central clearing, however, may lead to concentration risk into the clearinghouses. Stress testing is conducted in order to assess whether there is adequate financial resources available for use by the customer, the clearing member and the clearinghouse to meet contract obligations. Deviations in value of the position under the extreme scenarios are compared to the available financial resources to cover any losses. In the event the stress test shows potential deficiency, a cutback in the position or a boost in financial resources may be called for.

CFTC Stress Test

The test included eleven scenarios and analyzed highly traded products, such as futures and options, interest rate swaps, and credit default swaps at each clearinghouse. The CFTC staff considered several factors, including price changes in various products and correlations across markets, that occurred on certain dates with extreme volatility such as Sep 15, 2008 (the default of Lehman Brothers) and Jun 24, 2016 (the day following the Brexit vote).

CFTC Chairman – Timothy Massad – stated that the five clearing houses had sufficient resources to withstand highly stressed conditions. Massad also mentioned that the tests show “risk was diversified across clearing members – a loss at one clearinghouse does not mean losses at all. These are very important findings in measuring the strength and resilience of clearinghouses.”

Going Forward

CFTC intends to continue the stress test of multiple clearinghouses as part of its risk surveillance program on regular basis. The regulator also noted that its staff has identified developments that could be included into future exercises.

The latest stress test reflected financial soundness of the clearing houses and highly diversified positions of clearing members. We believe that gradual regulatory oversight, transparency and proper risk management would further ensure strength of clearing houses.

Currently, both CME Group and Intercontinental Exchange carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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