Stress test finds EU central counterparties are resilient

A follow-up to LeapRate’s earlier report about the European Securities and Markets Authority (ESMA) conducting the first European Union-wide stress test exercise regarding Central Counterparties (CCPs)…

As initially announced, the results of the stress test were unveiled on Friday – April 29, 2016.

ESMA’s stress test focused on the counterparty credit risk which CCPs would face as a result of defaults of a number of clearing members (CM) and simultaneous market price shocks.

The test examined the resilience of 17 European CCPs, which hold over EUR 150 billion worth of default resources with more than 900 CMs Union-wide. ESMA tested CCPs resources using combinations of CM default and market stress scenarios.

The results show that 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, CCPs faced small amounts of total residual uncovered losses varying from EUR 0.1 billion to EUR 4 billion. This was the case for scenarios assuming the default of the top-2 CMs per CCP due to assumed CM defaults across CCPs. That is a scenario where a CM defaulting in one CCP would also be considered to be in default in all CCPs, in which it is a member, leading to more than 25 CM defaulting EU-wide.

In addition, ESMA issued recommendations on how to improve CCPs’ internal methodologies, with these covering an assessment of the creditworthiness of CMs and methodologies for price shocks.

ESMA is required to carry out EU-wide stress tests of CCPs each year, under the European Market Infrastructure Regulation (EMIR).

You can view the official announcement from ESMA by clicking here.

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