LCH.Clearnet has proposed a stress testing framework for central counterparties (CCPs) in order to increase transparency into the risk management systems within clearing houses.
The testing is intended to enable clearing members to evaluate the strength and resiliency of different clearing houses, giving them benchmarks to compare different CCPs.
Market participants are seeking increased transparency around CCPs, which have taken on a pivotal role to reduce systemic risk in the financial markets following the financial crisis.
As a result of this demand, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions recently announced that they will be undertaking a review of stress testing by CCPs.
“The ability of clearing members to make informed decisions based upon the resiliency of clearing houses is fundamental to minimising systemic risk and strengthening international financial markets,” LCH.Clearnet said in its whitepaper.
The clearing house operator added that stress testing should be based around three principles; transparency, simplicity and comparability.
“Using the methodology outlined in this paper, clearing member risk managers that today struggle with the opacity of non-compatible and non-standardised reports supplied by CCPs, would instead benefit from a single readily understandable framework,” the CCP said in the report.