October 16, 2017 / 4:08 AM / 2 years ago

Three biggest U.S. clearing houses pass liquidity stress tests: CFTC

WASHINGTON (Reuters) - The three largest U.S. clearing houses have all passed stress tests assessing whether they could handle a major market shock, the country’s derivatives regulator said on Monday.

CME Clearing, a unit of CME Group Inc (CME.O); ICE Clear U.S., a unit of Intercontinental Exchange Inc (ICE.N); and LCH Ltd, a unit of London Stock Exchange Group Plc (LSE.L), could all generate enough liquidity to settle payments if two of their largest members defaulted, the Commodity Futures Trading Commission (CFTC) said in a statement.

Clearing houses sit in between a trade to guarantee payment in the event either counterparty defaults.

New rules introduced in the wake of the 2007-2009 financial crisis have forced banks to push hundreds of billions of dollars worth of trades through clearing houses, sparking fears they have become “too big to fail.”

Because clearing houses connect multiple large banks through a shared pool of trades and collateral, the failure of a clearing firm to meet its payment obligations could cause panic across the market, potentially leading other firms to default.

The CFTC assessed the impact of a hypothetical “extreme but plausible market scenario” in which two systemically important members at each clearing house defaulted. The test encompassed cleared futures and options, and interest rate swaps. They were based on actual positions and collateral as of Aug. 16, 2017, the CFTC said.

“All of the clearing houses demonstrated the ability to generate sufficient liquidity to fulfill settlement obligations on time,” the CFTC said.

The regulator said it would assess other potential scenarios in future stress tests, including other types of liquidity that clearers might be required to generate and how derivatives markets might react if a clearing house needed to liquidate positions.  

Reporting by Michelle Price

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