The European Association of CCP Clearing Houses (EACH) has today responded to the ESMA call for evidence on the Climate Risk Stress testing of CCPs. EACH appreciates the opportunity to provide feedback on Climate Risk in relation to CCPs.
A summary of the key ideas contained in the EACH response to the call for evidence is included below:
- Agree with Physical, Transition and Business as key pillars of Climate risk – EACH agrees with the classification of Physical, Transition and Business risk as key pillars of Climate risk. We would however, welcome feedback from ESMA on how Collateral Replacement risk fits into the picture with three aforementioned standard risk categories.
- Question Transition risk as a pillar in CCP Stress Testing, but relevant under Credit Counterparty risk – Whilst Transition is a key pillar of Climate Risk, EACH respectfully considers that its relevance as its own pillar in stress testing CCPs is questionable. This is due to the fact that it is very unlikely that transition risk will take place during the 2-7 day MPOR. However, EACH considers that transition risk is relevant to stress testing in relation to Credit Counterparty risk as this takes place over a longer time-horizon.
- Modelling Business Risk – When dealing with business risk, EACH believes that all sectors can be affected by it. Where modelling it is concerned, we note that certain sectors may face constraints here. In addition to this, we look at how to classify products in terms of Business risk, that would be to divide into the categories of 1) Green (clean) 2) neutral or 3) Brown (dirty).
- The importance of Metrics – Whilst not mentioned in this paper, EACH emphasises the importance of developing, using and disclosing metrics as a key factor for dealing with Climate risk going forward.
- Data Management and confidentiality – EACH generally believes that ESMA’s suggested process addresses Data Management concerns. We also note that using public sources, such as Public Quantitative Disclosures (PQDs) would deal with potential confidentiality issues related to publication of Stress Test results.
- Mapping Climate risk – Whilst it has it is divided into its own categories, such is the nature of Climate Risk that when mapping it, it will also undoubtedly appear in Credit, Market, Liquidity, Operational, and Legal risk. EACH notes the importance of considering this when mapping Climate risk.
For more information, please see our paper (attached and available via this link) or visit the EACH website at www.eachccp.eu
