ESMA Publishes First EU CCP Stress Test Results

Results show that European CCPs are well equipped to face counterparty risks associated with the considered stress scenarios.

The European Securities and Markets Authority (ESMA) today released the results of its first EU-wide stress test exercise regarding Central Counterparties (CCPs). The aim of the exercise is to assess the resilience and safety of the European CCP sector as well as identifying possible vulnerabilities.

ESMA, which recently released its Final Report on CCP Interoperability Risks and Costs, aimed at increasing liquidity and regulatory harmonization within EU markets, said that the test results show that the system of EU CCPs can be assessed overall as resilient to the stress scenarios used to model extreme but plausible market developments.

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The European Market Infrastructure Regulation (EMIR) requires ESMA to conduct EU-wide stress tests of CCPs on an annual basis. The tests are conducted in cooperation with NCAs, which supervise CCPs through supervisory colleges, and the European Risk Board (ESRB).

Findings

ESMA’s tests focused solely on the counterparty credit risk which CCPs would face as a result of multiple clearing member (CM) defaults and simultaneous market price shocks. Being the first EU-wide stress test exercise for CCPs, ESMA focused on the counterparty credit risk aspects of CCPs, leaving additional risk dimensions for future exercises. ESMA also issued recommendations on how to improve CCPs’ internal methodologies.

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ESMA tested the resilience of 17 European CCPs which held over €150 billion worth of default resources with more than 900 CMs union-wide. Also tested were CCPs’ resources using combinations of CM default and market stress scenarios. The results show that their resources were sufficient to cover losses resulting from the default of the top-2 EU-wide CM groups combined with historical and hypothetical market stress scenarios.

Under more severe stress scenarios, CCPs faced with small amounts of total residual uncovered losses varying from 0.1 billion up to 4 billion euros. This was especially the case for scenarios assuming the default of the top-2 CMs per CCP due to assumed CM defaults across CCPs. That is a scenario where a CM defaulting in one CCP would also be considered to be in default in all CCPs, in which it is a member, leading to more than 25 CM defaulting EU-wide.

Commenting on the findings, Steven Maijoor, ESMA Chair said: “CCPs play a significant role in financial markets by reducing the exposure risk of clearing members. Therefore, ensuring that CCPs are resilient to shocks is an important supervisory tool to mitigate systemic risk. ESMA’s first EU-wide stress test shows that European CCPs are overall well equipped to face the counterparty risk associated with the considered stress scenarios.”

Recommendations

Following the findings, ESMA has issued recommendations addressed to the National Competent Authorities (NCAs) of CCPs. Although EU CCPs are well equipped to face severe scenarios, ESMA has included recommendations addressed to the NCAs of CCPs covering areas such as the assessment of the creditworthiness of CMs and methodologies for price shocks.

ESMA has also issued a Q&A document which explains in further depth the overall scope of the stress tests exercise, the different scenarios and methodologies applied.

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