Europe’s clearers have passed the first ever stress-test exercise carried out by the European Securities and Markets Authority (ESMA).
The results found that that the resources currently held at Europe’s central counterparties (CCPs) were sufficient to cover losses resulting from the potential default of the two largest bank clearing members.
ESMA tested the resilience of 17 European CCPs which held a combined €150bn worth of default resources with more than 900 clearing members, and focused on their counterparty credit risk procedures.
“ESMA’s first EU-wide stress test shows that European CCPs are overall well equipped to face the counterparty risk associated with the considered stress scenarios,” said Steven Maijoor, ESMA chair.
However, the test also found that under more severe stress scenarios, CCPs faced small amounts of total residual uncovered losses which could vary from €100 million to €4 billion.
“This was especially the case for scenarios assuming the default of the top-2 CMs (clearing members) 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,” ESMA stated.
ESMA has recommended that CCPs should incorporate an assessment of the potential exposures they face with banks that are clearing members with other CCPs. It also recommended to national authorities to ensure CCPs revise their price shocks used in stress test methodologies.