T&T Securities Market Stress Test | Local company
T&T Securities and Exchange Commission
The ongoing ramifications of the Covid-19 pandemic in financial markets globally further underscore the importance for organizations to implement appropriate risk mitigation strategies. In accordance with Section 6 (l) of the Securities Act, 2012 (SA 2012), it is the responsibility of the Trinidad and Tobago Securities Commission (TTSEC) to assess, measure and assess the exposure to risk in the securities industry. Therefore, performing periodic stress tests of the market is an essential function.
In financial terminology, stress testing is a risk management technique used to assess vulnerabilities in an institution’s financial condition, following a specified set of adverse scenarios. It is mainly used to assess the resilience of a company or a sector in the event of poor financial conditions.
The 12-step stress testing process
Step 1: Definition of institutional capture
When performing stress tests, it is important to select which entities to include based on various criteria, such as size, complexity of activities, and interdependence of markets. TTSEC stress tests may focus on specific areas of the market, for example collective investment schemes (mutual funds), or may focus on registrants registered under Articles 36 and 51 (1) of the SA 2012, i.e. self-regulatory organizations, brokers. , investment advisers and underwriters.
Step 2: Identify Key Triggering Events
A trigger event is a situation that causes an interruption in which it is difficult for registrants to function normally. These trigger events should not be confused with the transmission channels (as seen in step 4), as they should be directly related to a specific stress event and should occur independently of other stresses in the industry. For example, a massive customer migration would force companies to find enough financing to reimburse departing customers.
Step 3: Translate key trigger events into tangible impacts
Once the triggers are identified, they will be converted so that they can be experienced individually by the registrants. The time period for these impacts is also identified during this step; whether short term or long term, as well as the potential outcomes of these events.
Step 4: Identify all relevant transmission channels and links
When performing a stress test, it is possible that ripple effects may be felt by other registrants as a result of a specific stress scenario affecting a particular registrant. It is therefore important to consider these indirect constraints that can be transmitted and the channels through which they can be amplified. For example, if we continue to consider a situation where a registrant cannot find funding in the event of a massive customer migration, it can create a ripple effect for other registrants as investors may lose confidence in the market. , which further amplifies the scenario.
Step 5: Definition and quantification of stress test scenarios
A first series of scenarios will then be created from the list of triggering events, as well as the potential impacts and the transmission channels are identified. Single factor and multivariate tests can be used. Single-factor tests aim to understand and calibrate the vulnerability of markets to particular stresses, while multivariate tests aim to understand how real-world crises might impact the market.
Step 6: Obtain the relevant data
TTSEC currently uses its Micro and Macro Prudential Reporting Framework (MMRF) to capture key metrics and perform analysis to assess the health, strength and vulnerabilities of the local securities industry. This data informs key metrics for all segments of the securities industry (mutual funds, pensions, etc.) and is used to perform stress tests on registrants.
Step 7: Performing the stress test (first round)
The first round of stress tests will be carried out once scenarios, triggers, impacts and transmission channels are identified and quantified. The constraints will be applied to individual companies and then aggregated to show results at the segment or market level.
Step 8: Evaluate Stress Test Results and Review Assumptions
As stated earlier, the intention of stress testing is to assess whether companies are able to continue operating under the specific conditions of the test cases. If companies are not able to operate normally, one must understand the main constraints that will have an impact on capital adequacy (solvency test) and liquidity (liquidity test).
Step 9: Perform the stress test (second round)
A second round of stress tests will only be included and analyzed after reviewing the results of the first round. The adjusted financial statements, after the first round, will be tested with a new set of scenarios to see if companies have ultimately failed or passed the solvency and liquidity test.
Step 10: Communicate Stress Test Results
Results will be communicated to internal and external stakeholders, as determined, to help identify appropriate risk mitigation strategies. Note, however, that the results are in no way considered as forecasts and predictions.
Step 11: Follow up
Once the stress test results have been consolidated, the TTSEC will decide on the necessary actions. This can include micro-prudential actions such as closer oversight of companies or their management actions, or macro-prudential actions such as regulatory policy decisions aimed at identifying and mitigating systemic vulnerabilities.
Step 12: Institutionalization of tests
Stress tests of the local securities industry are continuously refined by TTSEC to create a culture of risk management; which ultimately strengthens the financial sector.
Through stress testing, TTSEC will perform sector analysis of risks, vulnerabilities and dependencies. It therefore plays an important role in our oversight effort by identifying weaknesses in the health and operations of the security industry, and providing the opportunity to formulate appropriate responses at the micro or macro level. By monitoring the securities market and its participants, TTSEC is better able to predict and / or fill gaps before they negatively impact the market and investors. Stress testing therefore helps to create a safer and more robust securities market in which investors can feel confident.
Regulate the securities industry so that you can invest with confidence.
For more information on the securities market, visit us at www.ttsec.org.tt and to learn more about investing, see our investor education website: www.investucatett.com. You can also follow us on Facebook; Twitter; Instagram, LinkedIn and YouTube.