The Bank of England (BoE) has published the results of its third and latest public UK CCP supervisory stress test (SST). The test focused on the credit resilience of three UK CCPs – Ice Clear Europe, LCH, and LME Clear – and their ability to withstand severe market shocks and the default of two or more members. Compared to previous years, the findings indicate that UK CCP clearing services “generally experience greater depletion of mutualised default fund contributions”.
The baseline market stress scenario used in this year’s stress test was designed to “capture market risks arising from escalating geopolitical and trade tensions and a negative shock to growth expectations”. It was “calibrated to be equivalent in severity to the historical worst at each clearing service in terms of the expected profit-and-loss (PnL) impact”. Additionally, multiplier scenarios were included to “explore resilience to more extreme scenarios”.
Adequately resilient
The core credit stress test found that “all UK CCPs have adequate pre-funded resources to cover a severe stress scenario and the default of the ‘cover-2’ members – the two members whose default generates the greatest depletion of mutualised resources at the CCP”. This was without incluidng the incremental costs of liquidating concentrated positions.
When the analysis was extended to include the cost of liquidating concentrated defaulters’ positions, only LME Base, LME Clear’s clearing service, did not have sufficient prefunded resources to absorb the impact. BoE acknowledged that this result might be due to the modelling in the test being “not tailored to the particular markets that LME Base serves”.
A drop from past years
Although the results of the test show that all UK CCP clearing services are resilient to the default of their cover-2 population under the baseline market stress scenario, they experienced greater depletion of mutualised default fund contributions compared to in previous exercises. This could in part, be credited to CCPs unwinding prefunded resources between the reference dates for the 2023 and 2024 SSTs due to market volatility in 2022.
The BoE states that it will use findings from this SST to “support and inform its ongoing supervision and regulation of UK CCPs. It will follow up with the three CCPs regarding the approach to the risks identified.
