The Financial Sector Assessment Program, a joint effort between the International Monetary Fund and the World Bank, has issued its latest review of the United States on 10 August. While the full assessment covered the entire US financial system, the review also included a technical note entitled, "Supervision of Financial Market Infrastructures, Resilience of Central Counterparties and Innovative Technologies." That note highlighted specific challenges for the supervision of derivatives clearinghouses including "resource constraints" at the Commodity Futures Trading Commission as well as the agency's approach to consultation on rule changes at systemically important central counterparties.
Key items from the technical note include the following areas:
Rule approval for top CCPs - The FSAP recommended the US "reconsider the rule approval process for systemically important CCPs regulated by the CFTC as the current 'no-objection' approach is considered not to be in line with the systemic profile of CCPs." Instead, the official body suggested an affirmative approval process, as in place at the US Securities and Exchange Commission, combined with public consultation.
Inconsistent and opaque CCP risk management standards - The assessment said that "in some cases, the outcome of the implementation of risk management standards by CCPs was uneven, and potentially may impact financial stability or market efficiency, specifically regarding the independence of the risk management function, the conservativeness of the margin period of risk (MPOR), and the implementation of intraday margining rules." The FSAP recommended that the Federal Reserve, the CFTC, and the SEC collaborate to provide more consistent and efficient implementation. The assessment also noted that "transparency of CCP risk management remains a concern of clearing members. Clearing members can use the SEC and CFTC’s rule change process to obtain greater transparency into CCP practices, however … not all rule changes require a public consultation."
Inclusion of clearing members in stress tests - The FSAP recommended "US supervisory stress tests that include all systemically important CCPs, and knock-on effects on clearing members, liquidity providers, and other FMIs where relevant." The FSAP added that a key aspect of the supervisory stress test would be "the use of a standard set of stress scenarios, which allows for an evaluation of the collective response of all systemically important CCPs from a credit risk perspective, a liquidity risk perspective, or both." The assessment recommended the Fed oversee such a stress test.
Cross-border harmonization - "The CFTC’s efforts in contributing to a global deference and cooperation framework are important to address market fragmentation," the assessment said. "The SEC should consider further developing its deference framework as well."
CFTC funding - The FSAP pointed out that that "CFTC resources are considerably less than those at the FRB [Federal Reserve Board] and SEC," and added that while the Fed and the SEC both have "sufficient powers and resources to execute their mandates," the CFTC’s effectiveness is "impacted by resource constraints, which need to be addressed."
CME MPOR - The FSAP assessment specifically mentioned CME Group's Margin Period of Risk (MPOR) as being out of line with global standards. "The minimum MPOR of one day for contracts at CME seems low compared to MPORs adopted by CCPs for other exchange-traded derivatives markets, domestic or abroad," the report said. "Although customer margins collected on a one-day gross can provide a sufficient level of coverage to a CCP and better protect clients and mitigate systemic risks, it is nonetheless recommended to review this for all accounts to ensure that the CCP is sufficiently protected in case large positions need to be liquidated, and to avoid negative procyclical margin calls in times of stress. Furthermore, uneven outcomes of implementation may negatively impact the level playing between competing CCPs."
Access the full US Financial System Stability Assement as well as the full technical note on FMI, CCPs and technology.
