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ESMA launches third EU-wide CCP stress test exercise

Apr 05, 2019
The European Securities and Markets Authority (ESMA) has 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. 

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.

Source: ESMA