CFTC report says DCOs hold sufficient resources to withstand shocks

The Commodity Futures Trading Commission released a report on the results of its fourth Supervisory Stress Test (SST) of derivatives clearing organization (DCO) resources.

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Among the key findings in the report – called the Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results – it found that DCOs hold sufficient financial resources to withstand many extreme and often implausible price shocks.

The purpose of the analysis was to identify hypothetical combinations of extreme market shocks that would exhaust DCO committed capital and assess how DCOs might fare under extreme stress.

CFTC staff previously conducted SSTs in 2016, 2017, and 2019. The 2019 SST included a reverse stress test component, and this 2024 SST is a major expansion of that. It includes nine DCOs, representing 11 clearing services across four asset classes — futures and options on futures, cleared interest rate swaps, credit default swaps, and foreign exchange products.

Staff analyzed both house and customer accounts of all CMs using actual positions as of Sept. 1, 2023. Further, 11 volatile dates since 2020 were selected as base market stress scenarios. These dates captured a diversity of extraordinary market stresses associated with several events — the COVID-19 pandemic, the war in Ukraine, and the period of elevated inflation and related interest rate/banking impacts. These one-day market shocks were then expanded incrementally by multiples to well past plausible levels.

The results of this 2024 stress test analysis show:

• All individual DCOs hold sufficient financial resources to withstand many extreme and often implausible price shocks, along with multiple defaults of their CMs. In some cases, DCOs can withstand the default of all CMs that have losses resulting from highly implausible price shocks.
• Potential costs to non-defaulting members do not appear to be problematic. Under a very extreme and likely implausible scenario, with shocks three times one of the most volatile days in recent years, concurrent with three synchronized defaults, costs at the clearing members paying the vast majority of default funds and assessments represented only 0.07 percent of the Tier 1 capital of their parent entities, on average.
• The effects of interconnectedness were muted across DCOs, except for extremely implausible scenarios. Extreme events for one DCO are not commonly extreme events at the other DCOs, nor are the extreme losses for clearing members at one DCO experienced to the same extent at other DCOs at which they are a member.