SIFMA urged the Federal Reserve Board to revise the Global Market Shock ("GMS") and Large Counterparty Default ("LCD") components of the Comprehensive Capital Analysis and Review ("CCAR") framework.
In a white paper, SIFMA performed a statistical analysis of the CCAR framework to assess (i) underlying assumptions of the GMS, including severity, plausibility, stability and the degree of conservatism; (ii) "calibration and correlation" assumptions embedded in the GMS; (iii) "coherence of incorporating" the GMS into the LCD; and (iv) "transparency and coherence" of the complete CCAR structure.
SIFMA stated that the "CCAR framework as applied to trading book exposures has not been revised since adoption over ten years ago and, as a result, is unsophisticated relative to the significant advancements in the prudential regulatory framework and risk management practices that have been made since that time."
SIFMA observed that:
- post-crisis regulations resulted in "significant changes" in market structure and practices, reducing the threat of potential vulnerabilities in the financial system;
- in recent years, regulators have become "more proficient" at modeling approaches;
- many fundamental assumptions underlying GMS scenario calibration are "excessive and not plausible";
- the LCD approach, "driven by the severity of the GMS," is neither "useful [nor] credible" for risk management purposes; and
- GMS and LCD are continually decreasing in their transparency as opposed to other components of CCAR.
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