The U.K. Financial Services Authority will encourage central clearinghouses to conduct daily stress tests as part of reviews of how they manage the risk of members defaulting on derivatives contracts, the watchdog said.
The scenarios used to test central counterparties should be “subject to senior management sign-off,” the FSA said in a statement on its website. The watchdog said it would use the standards to assess applications for new clearing services, as well as the robustness of existing central counterparties.
Clearinghouses operate as counterparties for every buy and sell order executed by their members, who post collateral to reduce the risk of loss in the event of one party defaulting. The FSA said in the statement that “stress testing analysis on a daily basis” for clearinghouses was “good practice.”
Global supervisors at the Financial Stability Board, the regulatory body set up by the Group of 20 Nations following the 2008 collapse of Lehman Brothers Holdings Inc., said earlier this month they may expand the definition of a too-big-to-fail financial firm to cover clearinghouses. Regulators should decide by June on the “appropriate form” of central clearers dealing with derivatives, the FSB said.
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