LCH.Clearnet, the London Stock Exchange’s clearing business, has urged regulators to adopt a global standard for stress testing central counterparties so that clearing members can assess risk and default management procedures on a consistent basis.

Clearing houses are playing an increasingly important role in the financial system as bilateral over-the-counter products have been increasingly forced into a central cleared environment since the financial crisis.

CCPs already regularly stress test their default management processes but regulators have not set a standardised test. In addition, clearing houses that operate in multiple jurisdictions are regulated or supervised by regulators in each of those countries making like-for-like comparisons very difficult.

In a white paper, “Stress this house – a framework for the standardised stress testing of CCPs”, LCH.Clearnet said a global standard could be achieved within a reasonable timeframe.

“A harmonised set of stress tests will create a level playing field across the different regulatory jurisdictions and will present a consistent measure of the relative resilience of competing CCPs,” added LCH.Clearnet.

This month the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions said they would jointly undertake a review of stress testing by CCPs.

LCH.Clearnet said: “The ideas and concepts laid out in this paper are designed to serve as a foundation on which CPMI-IOSCO could base their methodology for a global standardised stress test.”

The CCP warned that if global stress testing standards are not adopted, clearing houses may engage in a race to the bottom, where they compete on lower margin requirements in order to attract more business.

Last November Kay Swinburne, MEP in the European Parliament, said at a Eurex Clearing conference that U.S. insolvency laws are the “elephant in the room” preventing global coordination on resolution regimes for central counterparties.

She said:“There is no client segregation in the US, as here in Europe, as the US believes that clients should absorb losses at an early stage which is not acceptable to European customers. The big elephant in the room is US insolvency law which prevents what we would consider best practices.”

Yesterday the European Central Bank and the Bank of England announced enhanced arrangements for information exchange and cooperation regarding UK CCPs with significant euro-denominated business.

This followed the UK winning a case court against the ECB who had wanted all euro-denominated payment transactions to be cleared within the Eurozone.

Featured image via milo827/Dollar Photo Club