EU clearing houses pass second stress test

ICE Clear Europe and BME Clearing faced minor shortfalls, but overall EU CCPs passed the stress test.

Central counterparties (CCPs) have successfully passed the European Securities Markets Authority’s (ESMA) second EU-wide stress test.

The stress test aims to assess the overall resilience of clearing houses in the industry and identify possible vulnerabilities.

The second test, which focused on credit and liquidity risks, assessed 16 CCPs with approximately 900 clearing members on whether their liquidity would meet demands under various stress scenarios

Overall, ESMA found the EU CCPs were resilient and no major systemic risk concerns were detected, although two individual CCPs were highlighted as having ‘minor shortfalls’.

BME Clearing in Spain was found to have a marginal shortfall of required prefunded resources, but this had no systemic impact and the CCP has access to additional collateral of defaulting clearing members that could be used to cover the shortfall.

Similarly, ICE Clear Europe was found to have sufficient required prefunded resources, but excess margin held on top of the minimum requirements could potentially reduce the prefunded funds.

Chair at ESMA, Steve Maijoor, highlighted that despite CCPs being considered low-risk entities, the failure of a CCP has the potential to cause serious systematic risk.

“I am pleased to see that EU CCPs have responded well to the rigorous scenarios used in conducting this second EU-wide stress test and are overall fit for purpose with sufficient resources to withstand severe market conditions,” he said.

ESMA’s first stress test in 2016 found that overall CCPs had sufficient resources to cover losses at times of stress, although in more severe stress scenarios CCPs faced small uncovered losses.

The first test focused on CCP credit risk, whilst the second stress test included liquidity risks.

“The expansion of the stress test to include liquidity risk in addition to counterparty credit risk has provided added reassurance on their resilience. The CCP stress test will remain an indispensable supervisory tool in contributing to systemic resilience, financial stability and orderly markets,” Maijoor added.

The future of derivatives clearing in Europe has become a key battleground between the UK and European Union as the two sides engage in the increasingly drawn-out and fraught Brexit negotiations.

The vast majority of business for euro derivatives comes from London, primarily from LCH which cleared over $850 trillion over the course of 2017. Market participants have argued that forcibly moving euro derivatives clearing away from CCPs, such as LCH, would mean dramatic cost increases.

However, the European Central Bank (ECB) has raised fears that the clearing and settlement of euro-denominated derivatives outside of the EU exposes it to financial stability risks should the United Kingdom leave the bloc and is pushing to bring clearing operations under the control of the Eurozone.