The Bank of England’s 2025 stress test found that the UK’s three central counterparties hold sufficient pre-funded resources to withstand extreme market shocks and multiple member defaults, but the exercise highlights liquidity pressures that clearing members and their clients would face in a crisis.
The Bank’s fourth CCP stress test examined whether ICE Clear Europe (ICEU), LCH and LME Clear (LMEC) could absorb losses from their two largest members defaulting simultaneously under severe market conditions, including sharp equity declines, rising interest rates and commodity price falls. Existing pre-funded resources would be adequate to limit contagion to the wider financial system.
However, the test revealed that concentrated positions significantly amplify resource demands. When the Bank factored in the costs of liquidating large, illiquid positions held by defaulters, default fund usage jumped dramatically—from 19% to 39% at ICEU and from 12% to 53% at LMEC. These concentration costs matter most in products that trade infrequently but have deep open interest, where CCPs might struggle to liquidate positions without moving markets.
Liquidity pressure on non-banks
While banks would bear the bulk of variation margin calls – facing a net demand of £2.5 billion out of £90 billion in gross flows—non-bank financial institutions would face between £17 billion and £40 billion in gross variation margin demands under the stress scenario.
Initial margin calls, though smaller at £8.4 billion gross, would represent a net liquidity drain of £7 billion across the system, with £1.2 billion falling directly on NBFIs. The Bank noted these figures are smaller than estimates from its 2024 system-wide exploratory scenario, suggesting manageable systemic risk. Yet individual NBFIs may still need to liquidate or repo assets to meet demands.
The test’s findings arrive as global standard-setters intensify their push for margin transparency. In January 2025, the Basel Committee on Banking Supervision, CPMI and IOSCO published final policy proposals requiring CCPs to provide enhanced margin simulation tools and disclose how they calculate initial margin requirements. The reforms aim to help non-bank participants better anticipate and prepare for margin calls.
Porting assumptions matter
The Bank’s analysis showed that assumptions about client porting – the transfer of positions from a defaulting clearing member to a surviving one – significantly affect outcomes. At ICEU, allowing all clients to port would contain losses within the defaulter’s own resources, while assuming no porting consumed 19% of the default fund. Client clearing constitutes a larger share of activity at ICEU and LMEC than at LCH, making porting more material.
Recognising these challenges, the Bank has proposed regulatory changes to increase the probability of successful client portfolio transfers, detailed in chapters 15 and 16 of its consultation on UK EMIR reform.
No public test in 2026
The Bank confirmed it will not conduct a full public CCP stress test in 2026, instead developing internal stress-testing tools to assess a wider range of risks more dynamically. The next public exercise is scheduled for 2027.
