Guidelines for the Stress Testing of Futures Companies (for Trial Implementation)
- Area of Law： Futures
- Level of Authority： Industry Regulations
- Date issued：11-13-2017
- Effective Date：11-13-2017
- Status： Effective
- Issuing Authority： China Futures Association
Notice of the China
Futures Association on Issuing and Implementing the Guidelines for the Stress
Testing of Futures Companies (for Trial Implementation)
Members of all futures companies:
The Guidelines for the Stress Testing of Futures Companies (for Trial Implementation) (hereinafter referred to as the “Guidelines”), which have been deliberated and adopted in principle at the 15th Session of the 4th Council of the China Futures Association, are hereby issued and the relevant matters are hereby announced as follows:
I. All companies shall, in accordance with the requirements of the Guidelines, establish a normal stress testing mechanism, and establish and improve the stress testing system and organization system, among others, so as to ensure the effective implementation of stress testing.
II. All companies shall, according to the requirements of these Guidelines and according to market changes, business scale, risk status and regulatory requirements, conduct stress testing on a regular basis or from time to time. An annual comprehensive stress testing shall be conducted at least once a year, stress testing reports shall be submitted as required, and a separate notice will be issued on the specific testing requirements.
Contact person: Fu Wenxiang. Tel.: 010-88086242
November 13, 2017
Guidelines for the Stress Testing of Futures Companies (for Trial Implementation)
Chapter I General Provisions
Article 1 For the purposes of directing futures companies to establish and improve the stress testing mechanism, improving risk management and strengthening the prevention of systemic risks, these Guidelines are developed in accordance with the Regulation on the Administration of Futures Trading, the Measures for the Supervision and Administration of Futures Companies, the Measures for the Administration of Risk Regulatory Indicators, and other laws, administrative regulations, rules, and relevant self-disciplinary rules.
Article 2 For the purpose of these Guidelines, “stress testing” means the process of adopting the method of focusing on quantitative analysis to analyze and measure the changes of futures companies' net capital, liquidity and other risk regulatory indicators, financial indicators, and business indicators under the assumed, extreme but possible stress scenarios, assess the risk tolerance of futures companies, and take effective countermeasures.
Article 3 A futures company shall establish a normal stress testing mechanism, and on a regular basis or from time to time, conduct stress testing according to market changes, business scale, risk status and regulatory requirements. The stress testing shall comprehensively cover the risks of the company and its subsidiaries in all business fields, and fully consider the correlation between various types of risks.
Article 4 A futures company shall establish and improve a system of stress testing covering such content as decision-making mechanisms, procedures and methods, reporting procedures, application of results, and inspection and assessment.
Article 5 A futures company shall establish an effective stress testing organization system, designate senior executives of the company to be responsible for the organization of stress testing, and designate a special department or personnel to be responsible for the implementation of stress testing. All relevant departments and subsidiaries shall actively cooperate with and participate in stress testing, and provide conveniences for stress testing.
Article 6 A futures company shall conduct inspection and assessment of the stress testing work mechanism on a periodical basis, including whether the stress testing guarantee measures are sound, whether the procedures and methods are complete, whether the scenario assumptions are reasonable, whether the data quality and quantity models are reliable and effective, whether the testing results are applied in an effective manner and whether the countermeasures are effective and feasible, among others.
Chapter II Basic Requirements for Stress Testing
Article 7 The stress testing of a futures company shall focus on quantitative analysis, and a scientific and reasonable quantity model shall be built to determine and inspect the stress testing scenario parameters, the correlation between risk factors and the specific transmission process. The establishment and revision of the quantity model shall be subject to the relevant approval procedures in accordance with the decision-making mechanism of the company. In addition, in order to improve the efficiency of the quantity model, the futures company may take comprehensive expert experience and qualitative methods for judgment as the supplement.
Article 8 A futures company shall prudentially select the risk factors, quantity models and scenario assumptions for stress testing in a reasonable manner so as to facilitate the scientific analysis of the characteristics of various types of risks and their impact on the futures company.
Article 9 A futures company shall, when conducting stress testing, make stress testing programs suitable for the risk appetite, business scale, risk complexity and net capital requirements, or make corresponding testing programs according to the specific requirements of the regulatory authority.
Article 10 A stress testing program shall include the testing objectives, setup of scenarios, risk factors, testing objects, testing methods, testing intervals, reporting routes and other content. A futures company shall conduct stress testing under the framework of the testing program.
Article 11 A futures company shall, when conducting stress testing, formulate feasible and pertinent work flow and methods in close connection with the actual requirements for business management, the stress testing results shall be able to reflect the company's risk status, and effective measures may be taken according to the testing results.
Chapter III Stress Testing Methods and Flow
Article 12 The following flow shall be observed for the stress testing of a futures company: selection of objects, formulation of plans, determination of methods, setup of scenarios, determination of risk factors, collection of data, implementation of testing and analysis of results, and formulation and implementation of countermeasures, among others.
Article 13 The stress testing of a futures company shall cover comprehensive stress testing and special stress testing. “Comprehensive stress testing” means a process whereby a futures company conducts the measurement of its net capital, liquidity and other risk regulatory indicators and financial indicators, and then assesses the collective risk tolerance of the futures company. “Special stress testing” means a process in which a futures company assesses and measures the specific risks of a certain expected major matter or an emergent risk event according to its specific circumstances.
Article 14 The stress testing of a futures company may be conducted by such methods as sensitivity analysis and scenario analysis. “Sensitivity analysis” means the impact of a single important risk factor or a few closely related factors on the risk exposure and risk tolerance of the futures company in the case of any change in assumptions. “Scenario analysis” means the impact of multiple risk factors on the risk exposure and risk tolerance of the futures company when any change occurs.
Article 15 In the setup of stress scenarios, a futures company may adopt the historical scenario method, the assumed scenario method, or the methods for combining the two. The “historical scenario method” means simulated major risk events or significant stress scenarios in the history, and the “assumed scenario method” means the extreme circumstances that may occur in the future based on empirical judgment or quantity model.
Article 16 The scenario assumptions of a futures company shall generally cover three levels, i.e. mild, moderate and severe. The assumptions of risk factors generally cover adverse change of the futures market, fluctuation of the stock market or interest rate, bond default, and decrease of futures trading value.
Article 17 A futures company shall, under any of the following circumstances, conduct a special or comprehensive stress testing according to its circumstances:
(1) The circumstances that may seriously affect the net capital, liquidity or other risk regulatory indicators: major external investment or acquisition, major fixed asset investment, major capital expenditure, centralized maturity of liabilities, large-sum redemption, distribution of profits, and negative adjustment to categorized regulatory rating, among others.
(2) Carrying out major innovative businesses, determining the investment scale of its own funds, and determining the business plan and business scale, among others.
(3) Expected or occurred significant internal risks: significant losses in the investment of assets or self-owned funds, sudden increase of clients at risk in the brokerage business or large-area close-out, administrative penalties on government departments, major lawsuits or arbitration, and sharp decrease of liquidity, among others.
(4) Expected or occurred significant external risks and policy change events: the futures market and the securities market fluctuate sharply, the commission rate declines sharply, the trading volume is extremely shrinking, and extreme risk events such as unexpected events occur, or there are significant changes in regulatory policies, among others.
(5) Other possible or occurred stress scenarios.
The futures company shall prescribe “significant” standards for the aforesaid circumstances in light of the actual circumstances of the company.
Article 18 A futures company shall, after conducting stress testing, form risk regulatory indicators, financial indicators and other testing results under stress scenarios, analyze the testing results, and assess the risk tolerance.
The futures company may also use reverse stress testing methods to analyze the risk factors causing the over-limited, early warning or major adverse changes in the testing results, and conduct research on the countermeasures.
Chapter IV Reporting and Application of Stress Testing
Article 19 A futures company shall form a stress testing report on the stress testing situation, which shall cover stress testing programs, testing conclusions, risk issues, and relevant countermeasures, among others.
Article 20 A futures company shall conduct comprehensive stress testing at least once a year, and the futures company shall, before April 30 each year, submit an annual comprehensive stress testing report to the local CSRC office at the place where the company is located and the China Futures Association. In addition, the futures company shall also, according to the requirements of the regulatory authority, conduct stress testing from time to time, and submit stress testing reports as required.
Article 21 A futures company shall pay high attention to the stress testing results, and take the stress testing results as an important basis for the company's business decision-making.
Article 22 Where the stress testing result of a futures company indicates that there may be any major risk that the risk regulatory indicators such as net capital and liquidity fail to comply with the regulatory standards, it shall report to the local CSRC office at the place where the company is located and the China Futures Association in a timely manner.
Article 23 Where the stress testing result indicates that the potential risks exceed the tolerance of the futures company, the futures company shall take effective measures such as adjusting the business and supplementing capital so as to control the risks within its tolerance.
Chapter V Supplementary Provisions
Article 24 Where a futures company violates these Guidelines, the China Futures Association shall take disciplinary punishment measures in accordance with the provisions of self-disciplinary rules.
Article 25 These Guidelines shall be subject to interpretation by the Council of the China Futures Association.
Article 26 These Guidelines shall come into force on the date of issuance.