Journal of Financial Market Infrastructures

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

Edward Anderson, Fernando Cerezetti and Mark Manning

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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