Fed Gov. Powell Advocates for Central Counterparty Stress Testing

In a speech at the Federal Reserve Bank of Chicago today, Federal Reserve Governor Jerome Powell said that regulators should increase their efforts to monitor for liquidity risk among central counterparties by conducting stress tests on those entities.

“Conducting supervisory stress tests on CCPs that take liquidity risks into account would help authorities better assess the resilience of the financial system,” he explained, adding that these efforts are already underway at the CFTC, which last year tested five major CCPs’ ability to withstand credit risk if one or more clearing members were to default. “This was innovative and necessary work. It would be useful to build on it by adding tests that focus on liquidity risks across CCPs and their largest common clearing members,” Powell said.

He also noted the interdependent relationship between banks and CCPs, and said that “global authorities… have a responsibility to ensure that bank capital standards and other policies do not unnecessarily discourage central clearing.” To that end, Powell said that the Basel Committee on Banking Supervision is considering changes to the supplementary leverage ratio for global systemically important banks, and that the Federal Reserve is considering additional changes to ease capital requirements for banks.