Global Market Shock Components
for Supervisory Adverse and Severely
Adverse Scenarios
The global market shock is a set of instantaneous,
hypothetical shocks to a large set of risk factors.
Generally, these shocks involve large and sudden
changes in asset prices, interest rates, and spreads,
reflecting general market distress and heightened
uncertainty.
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BHCs with significant trading activity
will be required to include the global market shock as
part of their supervisory adverse and severely adverse
scenarios.
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In addition, as discussed below, certain
large and highly interconnected BHCs must apply the
same global market shock to their counterparty
exposures to project losses under the counterparty
default scenario component.
The as-of date for the global market shock is Janu-
ary 4, 2016.
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2016 Severely Adverse Scenario
The severely adverse scenario’s global market shock
is designed around three main elements: a sudden
sharp increase in general risk premiums and credit
risk; significant market illiquidity; and the distress of
one or more large entities that rapidly sell a variety of
assets into an already fragile market. Liquidity dete-
rioration is most severe in those asset markets that
are typically less liquid, such as corporate debt and
private equity markets, and is less pronounced in
those markets that are typically more liquid such as
publicly traded equity and U.S. Treasury markets.
Markets facing a significant deterioration in liquidity
experience conditions that are generally comparable
to the peak-to-trough changes in asset valuations
during the 2007–2009 period. The severity of dete-
rioration reflects the market conditions that could
occur in the event of a significant pullback in market
liquidity in which market participants are less able to
engage in market transactions that could offset and
moderate the price dislocations. Declines in markets
less affected by the deterioration in liquidity condi-
tions are generally comparable to those experienced
in the second half of 2008.
Worsening liquidity also leads prices of related assets
that would ordinarily be expected to move together
to diverge markedly. In particular, the valuation of
certain cash market securities and their derivative
counterparts—so-called basis spreads—fail to move
together because the normal market mechanics that
would ordinarily result in small pricing differentials
are impeded by a lack of market liquidity. Notably,
option-adjusted spreads on agency mortgage-backed
securities (MBS) increase significantly. Illiquidity
driven dislocations between the cash and to-be-
announced (TBA) forward markets result in larger
increases in the option adjusted spreads on securities
than in the TBA market. Similarly, relationships
between the prices of other financial assets that
would normally be expected to move together come
under pressure and are weakened. As a result, certain
hedging strategies are less effective and resulting
losses are larger.
Globally, government bond yield curves undergo
marked shifts in level and shape due to market par-
ticipants’ increased risk aversion. The flight-to-
quality and lack of liquidity in affected markets
pushes risk-free rates down across the term structure
in the United States, with some short-term rates
dropping below zero. The yield curves for govern-
ment bonds flatten or invert across Europe and Asia
while volatility increases across the term structure.
The potential for a prolonged and more acute reces-
sion in Europe drive up sovereign credit spreads in
the euro zone periphery in a manner generally consis-
tent with the experience of 2011. Emerging market
countries with deteriorating economic and fiscal
accounts would also experience a sharp increase in
sovereign spreads.
The major differences between the 2016 and 2015
severely adverse scenarios include (1) a larger widen-
ing in credit spreads for municipal, sovereign, and
advanced economies’ corporate products; (2) gener-
ally, greater declines in the value of private equity
investments, recently issued securitized products, and
non-agency residential MBS; (3) a more severe wid-
ening in basis spreads between closely related assets
such as agency MBS and TBA forwards as well as
corporate bonds and credit default swaps; and (4) a
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The global market shock components consist of shocks to a
large number of risk factors that include a wide range of finan-
cial market variables that affect asset prices, such as a credit
spread or the yield on a bond, and, also include, in some cases,
shocks to the value of the position itself (for example, the mar-
ket value of private-equity positions).
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For this cycle, six BHCs are subject to the global market shock
components: Bank of America Corporation; Citigroup Inc.;
The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.;
Morgan Stanley; and Wells Fargo & Company. See 12 CFR
252.54(b)(2)(i)
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A BHC may use data as of the date that corresponds to its
weekly internal risk reporting cycle as long as it falls during the
business of the as-of date for the global market shock (i.e.,
January 4, 2016 to January 8, 2016).
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