.jpg)
The European Association of CCP Clearing Houses (EACH) acknowledges that the results of the fourth ESMA CCP Stress Test exercise ‘confirm the overall resilience of EU and third-country Tier-2 CCPs to credit, concentration and operational risks under the tested scenarios.‘.
The ESMA CCP Stress Test complements the already rigorous standards to which European CCPs are held by their regulators, laid down in EMIR and UK EMIR. In accordance with the legislation, CCPs themselves also perform daily stress tests on their systems and models to ensure that they are fit to perform in situations of extreme but plausible market stress and default. The outcomes of these internal stress tests are scrutinised by clearing members and regulators to ensure their continued validity. A broad number of authorities are included in the ongoing CCP supervision through the CCP Supervisory Colleges which include National Competent Authorities (NCAs) of the country where the CCP is located, NCAs from other countries, the ECB and ESMA itself.
ESMA’s analysis of CCPs’ ability to address eventual credit risks (i.e. the potential of default of clearing members), arguably the main risk that CCPs are meant to withstand, confirm that ‘ESMA did not detect any major systemic risk concerns under the tested credit scenarios’. Furthermore, ESMA notes that this risk is addressed with minimal consumption of pre-funded default fund resources without a need to recourse to recovery resources such as assessment powers. Importantly, ESMA analysed the interconnection of CCPs due to the existence of common clearing members and concluded that ‘the exercise did not highlight any pairs of (clearing member) groups that are at the same time and under the common tested scenario highly impactful at multiple CCPs.’
ESMA notes that concentrated positions may represent a significant risk for some CCPs, and we remain fully committed to making European CCPs even more resilient and therefore look forward to considering how to ensure that concentration risk is appropriately taken into account across CCPs and asset classes.
We also acknowledge ESMA’s first analysis of operational risk and the limitations to this first exercise. We look forward to further contributing to resilient capital markets from an operational point of view.
EACH welcomes ESMA’s and NCAs’ close monitoring of the impact on markets of the Russian invasion of Ukraine and notes ESMA’s conclusion that ‘overall, (…) CCPs remained resilient during the crisis, despite the extreme prices and increased market volatility’ and that ‘CCPs’ resilience was confirmed during the real-life market stress following Russia’s invasion of Ukraine’. We also particularly note ESMA’s warning about the potential that ‘the unpredictability of the evolution of the conflict may lead to additional extreme moves’. In this context, EACH notes that a war situation and an artificial supply reduction on commodities is unprecedented and this may call, besides additional measures by the CCPs, upon European authorities to ensure political support via suitable measures, such as in relation to the support of market participants to reduce liquidity stress.
EACH and its Members acknowledge the amount of work done by authorities and CCPs in performing this exercise, especially during a challenging environment still within the context of the COVID-19 pandemic and the latest geopolitical events. We look forward to continuing dialogue with regulators, clearing members and clients in order to offer an even more safe and efficient risk management process for the benefit of the markets and the economy as a whole.
For more information, please click here to download the ESMA paper or visit the ESMA website at www.eachccp.eu
