The European Securities and Markets Authority (ESMA) has published the results of its third stress test exercise regarding Central Counterparties (CCPs) in the EU, which confirm the overall resilience of EU CCPs to common shocks and multiple defaults. This third exercise builds upon the second stress test, published in early 2018 and focused only in credit and liquidity risk, and includes an assessment of the impact of liquidation costs for concentrated positions (concentration risk), highlighting the need for EU CCPs to accurately account for liquidation cost within their risk frameworks.
Credit Stress Test: ESMA ran two default scenarios, a Cover-2 per CCP and an EU-wide Cover-2, combined with the common market stress scenario. Only one of the 16 CCPs analysed exhibited a shortfall of pre-funded resources.
Liquidity Stress Test: The same two default scenarios than in the credit stress test showed all EU CCPs to be resilient under the tested assumptions, with only a few CCPs exhibiting a shortfall in at least one currency in a negligible volume compared to the size of the FX market.
Concentration Stress Test: The analysis found that concentration risk is factored in a majority of CCPs through dedicated margin add-ons, although some coverage gaps in commodity derivatives and equity products were found. Regarding individual clearing members coverage, 4 CCPs showed at least a clearing member with a required margin inferior to its market impact.
“ESMA’s third stress test of CCPs in the EU has found that overall CCPs are capable of withstanding severe shocks under common shocks and simultaneous defaults. This resilience was also demonstrated during the unexpected and unprecedented impact of the COVID-19 pandemic on the global financial system. This provides reassurance given the key role these market infrastructures play,” explained Steven Maijoor, ESMA Chair of the Management Board.
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