EU CCPs pass their stress test

ESMA (the European Securities and Markets Authority) last week published the results of a Europe-wide CCP (central counterparty clearinghouse) stress test that aimed to identify how resilient the region’s CCPs would be in times of stressed market conditions. The results of the testing, conducted on the basis of a default by the two clearing members that provide the most collateral to the European CCPs’ default funds, show that the region’s CCPs are sufficiently resilient to be able to deal with this scenario.

“CCPs play a significant role in financial markets by reducing the exposure risk of clearing members,” commented Steven Maijoor, chairman of ESMA, upon the completion of the testing. “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. However, ESMA has also issued recommendations addressed to the National Competent Authorities (NCAs) of CCPs. These recommendations are aimed to ensure on-going resilience which will require follow-up within CCP colleges.”

EACH (the European Association of CCP Clearing Houses) commented that, “ESMA’s report demonstrates that European CCPs are resilient and well equipped to withstand extreme market developments. EACH is pleased that the results indicate ‘that for the reporting dates the system of European CCPs can overall be assessed as resilient to the scenarios used to model extreme and plausible market developments. No scenarios have been identified that are expected to be plausible and have at the same time a destabilising systemic impact on an EU-wide level’ and that the ‘analysis of the concentration of exposures in CCPs does not suggest emerging systemic risks at the CCP or EU-wide level.’

So, within known parameters, CCPs are resilient to stressed market conditions. They have, however, been centrally placed as part of the regulatory response to the financial crises to best ensure safety and stability in financial markets. They are defined as a buyer to every seller and a seller to every buyer. In short, if one party to a transaction fails to fulfil their side of the deal, the CCP will make good any transaction.

The ESMA test found the 17 CCPs* tested were resilient to the failure of the two most prominent clearing members in the region. Under more severe hypothetical scenarios, however, there were shortfalls found across the CCPs. Taking into account the failure of the top two clearing members per CCP, which would entail those clearing members being in default across every CCP, the losses ranged from €100 million to €4 billion. This would mean the failure of 25 clearing members in Europe.

This scenario is highly unlikely to occur. When calculating the losses though, there are a great many intangibles. Just because something has not happened previously, or is currently deemed unfeasible, that does not mean that that will always be the case. The only thing we can learn from history is that when market conditions become stressed, it ushers in a period of great unpredictability.

“No scenarios have been identified that are expected to be plausible,” highlights EACH. CCPs are essentially in place to mitigate the unexpected, though.

Another intangible, especially concerning the calculation of losses, is the value of the collateral held by the CCPs that will be called upon in such times. It may not have the same value as it does now and it may not be as liquid. If CCPs are attempting to liquidate suddenly illiquid collateral, then the losses will spiral and they may find themselves in a position whereby they are unable to make good on their commitments.

All of this represents a Black Swan event. It should be noted that this is considered so unlikely as to be deemed implausible. It was, however, a Black Swan event that caused the last crises.


*The 17 CCPs tested include all 16 that have received regulatory approval from ESMA, as well as ICE Clear Europe, which is not yet listed as an approved CCP by the regulator.

Each CCP has a different risk and margining model from the next. Thomas Murray has developed a solution that enables you to anlyse the risk profiles and margining models of a global pool of CCPs. For more information, click here.

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