ESMA launches third EU-wide CCP stress test exercise
The European Securities and Markets Authority (ESMA) yesterday published the framework for its third EU-wide Central Counterparties (CCPs) stress test, marking the launch of its latest CCP stress test exercise. ESMA, as mandated under the European Markets Infrastructure Regulation (EMIR), initiates and coordinates this exercise to assess the resilience and safety of European CCPs to adverse market developments and to identify any potential shortcomings.
For this third CCP stress test, ESMA has further developed its framework, adding a new component to the exercise on concentration risk, in addition to assessments on credit and liquidity risks. This new component will be used to assess the impact of liquidation costs for concentrated positions.
Steven Maijoor, ESMA Chair, yesterday said:
“CCPs are systemically important and ensuring their resilience is critical for the stability of the entire financial system. It is crucial to have an EU-wide picture to identify emerging systemic risks related to CCPs and ESMA’s stress test exercise is fundamental to identifying weaknesses and potential spill-over effects.
ESMA’s stress tests continue to evolve, we have built on the knowledge acquired in the first two exercises and have added a new component on concentration risk to ensure the exercise is fit for purpose.
The CCP stress test is an indispensable supervisory tool to contribute to systemic resilience, financial stability and orderly markets.”
Scope and components of ESMA’s CCP stress tests
ESMA, in cooperation with National Competent Authorities (NCAs) and the European Systemic Risk Board (ESRB), test the resilience of European CCPs by exposing them to different stress scenarios comprising of ‘extreme but plausible market conditions’. CCPs’ resilience will be assessed against a combination of multiple participant defaults and simultaneous market price shocks. The new stress test exercise has the following components:
- Credit Stress: Assess the sufficiency of CCPs’ resources to absorb losses under a combination of market price shocks and member default scenarios;
- Liquidity Stress: Assess the sufficiency of CCPs’ liquid resources under a combination of market price shocks, member/liquidity provider default scenarios and additional liquidity stress assumptions;
- Concentration risk: Assess the impact of liquidation costs derived from concentrated positions; and
- Reverse Credit Stress: Increase the number of defaulting entities and level of shocks to identify at which point resources are exhausted.
ESMA will also carry out additional analyses on the degree of inter-connectedness of CCPs, concentration of CCPs credit and liquidity exposures and a clearing member knock on analysis.
Market Stress Scenarios
The ESRB General Board has approved the adverse scenario and transmitted it to ESMA. The European Central bank (ECB), in close collaboration with the ESRB and ESMA, has developed the narrative and calibrated the adverse scenario for the third CCP stress test, involving triggering one or more of the sources of systemic risk to the EU financial system, as identified by the ESRB.
The CCPs will be exposed to stress shocks that are defined for a large number of risk factors across all relevant asset classes. The shocks are derived using a methodology that considers the joint empirical distribution of historical observations of the risk factors deemed relevant to EU CCPs to produce a coherent scenario. The purpose of the stress test is not to assess the compliance of CCPs to the minimum regulatory requirements but assess their resilience to macro-economic scenarios that can have an EU-wide impact.
CCPs Involved and Timeline
The new exercise will cover the 16 CCPs authorised in the EU. Concerning the three UK CCPs (LCH Ltd, ICE Clear Europe Ltd and LME Clear Ltd), ESMA will include them within its exercise unless there is a no-deal Brexit. ESMA will shortly launch a data request to the CCPs.
Once received, the submitted data will first be validated by the NCAs and ESMA. This will be followed by the analysis and computation of the stress test results. The publication of the final report and results is scheduled to take place in Q2 2020.
Framework For The 2019 CCP Stress Test Exercise
ESMA Launches Third EU-wide CCP Stress Test Exercise
Latest News from
Public consultation: appropriate age for introduction of complementary feeding of infants19/04/2019 09:25:00
EFSA is seeking feedback from stakeholders and other interested parties on its scientific opinion on the appropriate age for introduction of complementary feeding of infants.
Stronger EU borders with a new standing corps of 10,000 border guards18/04/2019 15:25:00
TheEuropean Parliament hasadopted the ECs proposal to reinforce the European Border and Coast Guard Agency with a standing corps of 10,000 border guards by 2027.
European Parliament's vote on new rules to improve fairness & transparency of online platforms18/04/2019 13:37:00
The European Parliament has approved the new Regulation on platform-to-business trading practices that is aimed at establishing a fair, trusted and innovation-driven environment for businesses and traders when using online platforms.
WTO Boeing dispute: EU issues preliminary list of U.S. products considered for countermeasures18/04/2019 12:25:00
The EC has launched a public consultation on a preliminary list of products from the USA on which the EU may take countermeasures in the context of the ongoing Boeing dispute at the World Trade Organisation (WTO).
Registered substances mapped for regulatory action18/04/2019 09:25:00
The first report of the Integrated Regulatory Strategy presents a mapping of the universe of registered substances that are on the EU market. This information helps authorities to identify, plan and monitor the progress on identifying and regulating substances of concern.
The United States is Europe's main soya beans supplier with imports up by 121%17/04/2019 16:25:00
New figures released by the EC, show that imports of U.S. soya beans by the EU increased by 121% over the current market year (July 2018 to mid-April 2019), compared to the same period in the previous year.
EC updates the EU Air Safety List to maintain highest level of protection for passengers17/04/2019 15:37:00
The EC has updated the EU Air Safety List, the list of airlines that do not meet international safety standards, and are therefore subject to an operating ban or operational restrictions within the EU.
EC launches debate on more efficient decision-making in EU social policy17/04/2019 13:25:00
In his 2018 State of the Union speech, President Juncker announced a comprehensive review of all passerelle clauses provided for by the EU Treaties. As a result, three Communications have already been adopted: on common foreign and security policy (September 2018), on taxation (January 2019) and on energy and climate (April 2019). The Communication on the passerelle clauses in social policy is the fourth one.
EC welcomes adoption of new measures denying terrorists & criminals the means and space to act17/04/2019 12:37:00
The European Parliament has adopted 2 important Security Union legislative initiatives proposed by the EC on interoperability and explosive precursors.