The European Securities and Markets Authority (ESMA) has published the results of its first EU-wide stress test exercise regarding central counterparties (CCPs). The exercise is aimed at assessing the resilience and safety of the EU CCP sector as well as to identify possible vulnerabilities. The results of the stress test show that overall EU CCPs can be assessed as resilient to the stress scenarios used to model extreme but plausible market developments.

ESMA tested the resilience of 17 EU CCPs resources using combinations of clearing member (CM) default and market stress scenarios. The results show that the CCPs’ 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. However, under more severe stress scenarios, the CCPs faced small amounts of total residual uncovered losses varying from 0.1bn up to 4bn Euros.

Although EU CCPs overall seem well equipped to face severe scenarios, ESMA has included recommendations addressed to the Member State competent authorities (MSCAs) of the CCPs. These cover:

• assessment of the creditworthiness of CMs – a significant part of CCPs’ collateral are pooled resources of non-defaulting CMs. Therefore, ESMA recommends that CCPs incorporate in their creditworthiness assessment of CMs, the potential exposures these may face due to their membership in other CCPs; and
• methodologies for price shocks – ESMA has identified that in a number of cases the stress price shocks applied by CCPs for some of their cleared products are not as conservative as the minimum shocks defined for this exercise or do not replicate the most extreme historic price changes observed. Therefore, ESMA recommends that the MSCAs ensure that CCPs revise their price shocks used in their stress test methodologies where gaps have been identified in the course of the exercise.

View ESMA publishes results of EU-wide CCP stress test, 29 April 2016