The scenarios used to conduct these stress tests fall into two broad categories: historical scenarios and hypothetical scenarios. The scenario generation process is unique for these two types of scenarios.
Historical Scenarios
- Each Clearing Agency’s historical scenario set includes at least 50 stress scenarios selected from an expanding look-back window with a fixed starting date, encompassing over 10 years of historical data including the 2008 financial crisis, that represent extreme but plausible market events relevant to the applicable risks of each Clearing Agency. Additionally, these scenario sets are supplemented with historical stresses outside the look-back period, such as the volatile market situation in the Fall of 1987 and the volatile bear market in US Treasuries in 1994.
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Hypothetical Scenarios
The hypothetical scenarios are constructed according to potential market conditions and may include macroeconomic scenarios or other scenarios designed to stress certain model risk factors and assumptions. The design of macroeconomic scenarios, which is done in coordination with the Systemic Risk Office, within the Group Chief Risk Office, involves considerations of potential future events and their perceived impact to portfolio market risk factors. Hypothetical scenarios that are not linked to macroeconomic events are designed to stress model risk factors and assumptions such as concentration risk, extreme correlations, and risk factors that are not explicitly or adequately captured in margin models. Other ad hoc scenarios may be considered for risk management informational purposes.
New or changed stress scenarios applicable to market risk stress testing and liquidity risk stress testing are provided to a monthly cross-functional working group for collaboration and challenge. The cross-functional working group also reviews material from key subject matter experts to identify emerging and new risks that may be added to a risk inventory used to inform the stress scenarios.
The appropriateness of both the historical and hypothetical scenarios are reviewed monthly and more frequently than monthly when the products cleared or the markets served by the applicable Clearing Agencies display high volatility or become less liquid, or when the size or concentration of positions held by Members increases significantly, such as during the early period of the COVID-19 pandemic.
Stress testing results are reviewed monthly by DTCC’s Enterprise Stress Testing Committee (ESTC), which is responsible for the review, oversight, escalation, and governance of stress testing related activities at each Clearing Agency and is comprised primarily of senior management from DTCC’s risk management, business, and control functions. The committee meets at least monthly, and its responsibilities include (but are not limited to): reviewing stress testing policies, procedures, methodology, and test results; approving stress scenarios; and ensuring stress testing activities meet the risk tolerance requirements applicable to each Clearing Agency. Updates to stress scenarios are escalated for review by the Management Risk Committee (MRC) on a quarterly basis, or more frequently if appropriate.
The Clearing Agencies maintain written policies and procedures that describe their processes for calculating and monitoring stress test metrics. Current positions in a portfolio are used in the daily stress tests. Threshold breaches or substantial changes in stress test results are reviewed by Financial Risk Management in order to identify the causes and formulate responses, as needed. To the extent that stress tests indicate a potential impact on the sufficiency of each Clearing Agency’s prefunded and/or liquidity resources, management may consider options available to supplement resources. These options may include but are not limited to a request to certain Members to fund an additional clearing fund deposit or cash deposit to cover the liquidity exposures presented by those Members’ activity. (For NSCC Members, this additional cash deposit is defined in the NSCC Rules & Procedures as “Supplemental Liquidity Deposit”). The results of these reviews and related metrics are aggregated, reported, and discussed monthly with the MRC and shared monthly with the Board Risk Committee (BRC) and DTCC’s regulators.
Annually, the DTCC Market Risk Management and Liquidity Risk Management (LRM) teams present an overview to facilitate Management and the Boards’ oversight responsibilities for the Clearing Agencies’ risk management programs as required by the CCAS that includes, but is not limited to, an annual compliance assessment for each of the Clearing Agencies of the applicable provisions of Rule 17Ad-22 to the stress testing program with a view of the control environment, as well as initiatives and material changes undertaken by the Clearing Agencies. As part of that assessment, LRM also performs an annual liquidity assessment to review the sizing of liquid resources relative to peak liquidity needs of each Clearing Agency to assure the maintenance of sufficient liquid resources under a wide range of foreseeable stress scenarios that include both historical and hypothetical market scenarios selected from an inventory of risk factors. This assessment is presented to the MRC and the BRC.