On 8 November 2023, the Bank of England (BoE) published the results report from its 2023 Central Counterparties (CCP) Supervisory Stress Test (SST).
This was the second SST of CCPs that the BoE has carried out, and it incorporated several new innovations compared to the previous exercise, including an assessment of CPP resilience against more idiosyncratic shocks. From a wider perspective, it also included an assessment of the potential Initial Margin and Variation Margin calls that CCPs’ members might face in a stress – something that the BoE’s system-wide exploratory scenario exercise will examine in further detail.
The BoE explains that the results of the SST confirm the continued resilience of UK CCPs to market stress scenarios that are of equal and greater severity than the worst-ever historical market stresses. CCPs’ results have improved across each of the components of the stress test relative to the previous exercise. Notably, CCPs are able to more comfortably absorb default losses and maintain higher liquidity balances through the exercise, and they are also able to survive more extreme combinations of assumptions, which intentionally go beyond historical precedents and regulatory requirements.
The report notes that this reflects CCPs’ financial resources as well as levels of collateralisation that have increased after the periods of market volatility in energy, metals and UK rates markets in 2022. While this dynamic of higher market volatility leading to higher margins is expected and an integral part of CCPs’ risk models and risk management, the BoE has also deployed in-house models to understand how the results might look as Initial Margin levels have reduced following a period of lower volatility, supporting its assessment of UK CCPs’ resilience.
The BoE plans to use the findings from the 2023 CCP SST to support and inform its ongoing supervision and regulation of UK CCPs.