22 September 2017
CPMI Secretariat
[email protected]
IOSCO Secretariat
[email protected]
Re: Consultative Report on Framework for Supervisory Stress Testing of Central Counterparties (the “Consultative Report”) by the Committee on Payments and Market Infrastructures (“CPMI”) and the Board of the International Organization of Securities Commissions (“IOSCO”)
Dear Secretariats:
The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG” or “AMG”)1 appreciates the important work of CPMI and ISOCO in formulating principles for supervisory stress tests (“SSTs”) of central counterparties (“CCPs”). We believe that the framework proposed in the Consultative Report along with the interdependency study recently completed by global regulatory bodies2 appropriately prioritizes the need to understand risks arising from the interconnectedness within the central clearing system. AMG believes that this understanding of risks, coupled with corrective actions, will improve protection of customers such as pension funds and retail funds whom asset managers serve as fiduciaries.
AMG generally agrees with the approach taken by CPMI and IOSCO to establish a framework for SSTs and offers comments to further advance CPMI and IOSCO’s goals in establishing this framework. An important, common theme in our comments below is the need for SSTs, in addition to assessing vulnerabilities across CCPs to a common stress event, to take steps with CCPs to address the identified risks, overseen by the authorities responsible for the CCP(s) where vulnerabilities are identified. We believe that this logical step must be made explicit in the final standards because the true value of SSTs to customers will come from correcting identified credit or liquidity shortfalls. Explicitly including remediation as a purpose of SSTs also resolves a number of difficult issues with which the Consultative Report grapples, from design to disclosure. Further, it helps with the balancing of costs with benefits, avoiding “mission creep” in what could become an academic exercise and addressing some of the risks identified in the Interdependency Study.
AMG provides the following recommendations:
1. The SST Framework Should Include Additional Options that Will Improve
Simulation of Market Realities
AMG believes that SSTs, in testing for macro credit and liquidity risks, should use extreme but plausible scenarios that may include a sequence of stress events, as opposed to tests that are limited to a single event. Market participants and regulators know all too well that a financial crisis does not typically begin and end with a single market event. Rather, an initial event results in weaknesses being realized by cascading failures caused by liquidity and asset shortfalls. While we recognize that sequential SST scenarios are more complex to run, we believe that the macro focus helps to counterbalance the difficulty of accomplishing this analysis. As with other components included in the framework, using a series of events should be on the list of potential options from which regulators can select to design the SST.
AMG also believes that SSTs should simulate market realities by expanding the list of interdependencies that authorities may use in the assessment. SSTs should include consideration of: a) specific markets and products cleared; b) currencies in which the products are cleared; c) number and concentration of CCPs, clearing members and other participants; d) overlap of liquidity providers across CCPs; e) dual-hatted liquidity providers (e.g., institution serving as both liquidity provider and clearing member); and e) overlap across CCPs of service providers (e.g., custodians).
2. SSTs Should Have the Dual Purpose of Uncovering Risks and Remediating those
Risks at Either a CCP or Multi-CCP Level
AMG believes that SSTs should be expressly paired with remediation of any identified credit and liquidity risks in the system overall and, as applicable, in individual CCPs whose performance demonstrates weaknesses. The principle reason for running multi-CCP SSTs is to gain the ability to comprehensively and systemically assess risks to the clearing system before those risks become realities. Significant market events impact the financial system overall. SSTs will provide clarity on how the system overall and CCPs individually may weather a common stress event—in other words, how resilient is the system overall and how resilient is each CCP as part of that system under a common stress event. Rather than paying the price of failure in a future crisis, we believe that expressly connecting SST results with having the relevant authorities oversee remediation of identified risks will strengthen protection of customer assets and, relatedly, increase market confidence in clearing.
1 SIFMA AMG brings the asset management community together to provide views on policy matters and to create industry best practices. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $39 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.
2 Basel Committee on Banking Supervision (“BCBS”), CPMI, the Financial Stability Board (“FSB”) and IOSCO, Analysis of Clearing Interdependencies (5 July 2017), available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD570.pdf (the “Interdependency Study”).