ESMA Launches 2021 CCCP Stress Test
The European Securities and Markets Authority (ESMA), the EUâ€™s securities markets regulator, hasÂ published the framework for its fourth Stress Test for Central Counterparties (CCPs). ESMA, as required by the European Markets Infrastructure Regulation (EMIR), initiates and coordinates this exercise to assess the resilience and safety of recognised European Union (EU) and Tier 2 Third Country CCPs (TC-CCPs) to adverse market developments and to identify any potential shortcomings.
â–Şď¸Ź credit and concentration risks
â–Şď¸Ź improved methodologies (concentration costs and credit losses)
đźĄ‡ time operational risk
đźŹ˘ 13 CCPs authorised in đź‡Şđź‡ş + 2 đź‡¬đź‡§ CCPs classified as Tier 2 pic.twitter.com/WigZkjLvSa
— ESMA – EU Securities Markets Regulator đź‡Şđź‡ş (@ESMAComms) June 7, 2021
The 2021 Stress Test addresses credit and concentration risks, and uses improved methodologies, including lessons learned from previous exercises, such as assessing the combination of concentration costs and credit losses when liquidating defaulting portfolios or including an intraday exercise for credit. For the first time, and in line with ESMAâ€™s mandate, the exercise also covers operational risk.
Klaus LĂ¶ber, Chair of the CCP Supervisory Committee, said: â€śLast year demonstrated that financial systems are constantly evolving and subject to disruptions such as COVID-19 or Brexit. In that context, it is important to assess that EU CCPs, but also Third Country CCPs of systemic relevance to the EU (so-called Tier 2 CCPs), are resilient as key infrastructures for EU financial stability.
â€śIn this respect, the ESMA CCP Stress Test is an essential supervisory tool that contributes toÂ financial stability andÂ supervisory convergence in the EU.
â€śIn this 4thÂ iteration of the CCP Stress Test, we have further developed the credit and concentration components from the last exercise to develop a more aggregated vision of both risks and introduced a new operational risk analysis with the aim of assessing risks fromÂ sharedÂ service providers.â€ť
Scope and components of ESMAâ€™s CCP Stress Test
ESMA, in cooperation with National Competent Authorities (NCAs) and the European Systemic Risk Board (ESRB), tests the resilience of recognised EU and Tier 2 TC-CCPs by exposing them to different stress scenarios comprisingÂ extreme but plausible market conditions. The new stress test exercise has the following components:
- Credit Stress: assessing CCPsâ€™ resources ability to absorb losses under a combination of market price shocks and member default scenarios;
- Concentration risk: assessing the impact of liquidation costs derived from concentrated positions;
- Reverse Credit Stress: increasing the number of defaulting entities and level of shocks and/or liquidation costs to identify at which point CPPsâ€™ resources are exhausted; and
- Operational risk:Â assessing the importance of sharedÂ service providers in the clearing industry and interconnections of CCPs.
ESMA will also carry out an additional analysis of CCPsâ€™ resources and participants.
Market Stress Scenarios
The ESRB General Board has approved the new adverse scenario for use in this yearâ€™s test. The European Central Bank (ECB), in close collaboration with the ESRB and ESMA, has developed a new narrative and calibrated the adverse scenario for the CCP Stress Test, involving triggering one or more sources of systemic risk to the EU financial system, as identified by the ESRB.
The CCPs will be exposed to stress shocks that are defined for numerous risk factors across all relevant asset classes. The purpose of the stress test is to assess a CCPâ€™s resilience to macro-economic scenarios that can have a global impact.
CCPs Involved and Timeline
The new exercise covers the 13 CCPs authorised in the EU and the 2 UK CCPs classified as Tier 2 (LCH Ltd, ICE Clear Europe Ltd). The publication of the final report and results is scheduled to take place in H2 2022.
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