On 24 April 2024, the European Securities and Markets Authority (ESMA) published a follow up report which sets out the main outcomes of the global central counterparty (CCP) fire drill that took place during the week starting 13 November 2023. The exercise involved over 30 global CCPs running a simulation of their default management processes.

Global fire drills in which multiple CCPs simultaneously test their default management processes are a crucial element to ensure the readiness of CCPs, clearing members, clients, and other stakeholders, including regulators, for the default of a material clearing member. The objectives of fire drills typically include the sharing of default management best practices among CCPs, identifying potential areas of follow-on work and providing insights for regulators.

A key outcome of the 2023 fire drill was that no major bottlenecks were identified even though a number of areas for improvement were identified. Clearing members and their clients indicated that, in general, they were able to cope with the default of a material clearing member at multiple CCPs although some indicated the need to prioritise some auctions over others due to resource constraints, which led to mandatory auctions being prioritised, potentially resulting in less bids in non-mandatory auctions. Regarding the hedging and auction process, some respondents noted the need for careful consideration of the level of hedging and the size and nature of the auction portfolios as ways to reduce the risk level of the portfolio and improve auction results.

Next steps

ESMA states that it will work with fellow regulators, CCPs and their stakeholders to ensure the key takeaways from the fire drill are taken into account for the continuous improvement of CCP default management practices in the future.