Regarding BIS Guidance For Stress Testing OTC Derivatives

One of the systemic risks that has drawn the attention of monetary authorities that we have covered is over-the-counter derivatives. This area of investment/speculation has grown very large over time. Much of it also operates in what is sometimes called the "Shadow Banking" arena which is often not very transparent. Because these speculative OTC derivative contracts can lead to a situation where a major so called "too big to fail" entity gets in trouble, monetary authorities like the BIS have recognized the potential systemic risk. 

The Bank for International Settlements(BIS) has taken a leading role in trying to implement various counter measures to systemic risks that it can identify. In this case, they are issuing guidance for doing stress tests on key "central counterparties" (CCPs) who act as clearinghouses for derivatives trading. Below is the  latest press release from BIS on this issue and then a few added comments.

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