Supervisory stress testing for central counterparties: a macroprudential, two-tier approach

Edward Anderson, Fernando Cerezetti and Mark Manning

Journal of Financial Market Infrastructures

Abstract: Stress tests can be used to test the individual resilience of a single entity or to assess the system-wide vulnerabilities ;of a network. ;This paper examines the role of supervisory stress testing of central counterparties (CCPs). A key message is that the design of supervisory stress tests (SSTs) should be tailored to CCPs’ roles, risk profiles and financial ;structures. We examine how supervisory stress tests may be designed to complement CCPs’ own daily stress tests and argue that macroprudential supervisory ;stress testing of CCPs is valuable for both authorities ;and market participants. The paper offers practical guidance on the implementation of the exercises and proposes some specific design principles ;that should allow authorities to extract more information from such tests. We propose a two-tier ;approach that meets the intended policy objectives while balancing ambition and resource cost. The first tier encompasses more standardized tests that can be conducted frequently ;to assess the resilience of the clearing network over time. The second tier encompasses less frequent and more complex “deep-dive†;assessments. The proposed approach should overcome operational and resource challenges, which to date may have inhibited ;the widespread application of supervisory stress testing.

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