Washington, D.C. — The Commodity Futures Trading Commission today issued Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, a report detailing the results of its fourth Supervisory Stress Test (SST) of derivatives clearing organization (DCO) resources. Among other findings, the 2024 report concluded the DCOs studied hold sufficient financial resources to withstand many extreme and often implausible price shocks.

The Risk Surveillance Branch of the Division of Clearing and Risk conducts periodic SSTs to assess how DCOs might fare under extreme stress. 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, which 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).

The purpose of the analysis was twofold: (1) to identify hypothetical combinations of extreme market shocks, concurrent with varying numbers of clearing member (CM) defaults, that would exhaust prefunded resources (DCO committed capital, and default fund), and unfunded resources available to the DCOs (this represents the reverse stress test component), and (2) to analyze the impacts of DCO use of mutualized resources on non-defaulted CMs.

Staff analyzed both house and customer accounts of all CMs using actual positions as of September 1, 2023. Eleven volatile dates since 2020 were selected as base market stress scenarios. These dates captured a diversity of extraordinary market stresses associated with: 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.

In the process of conducting this reverse stress test, the interconnectedness of DCOs through clearing members was explored.

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% 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.