Following its second public UK Central Counterparty (CCP) Supervisory Stress Test (SST), the Bank of England (BoE) has concluded that UK CCPs have “continued resilience” to “market stress scenarios that are of equal and greater severity than the worst-ever historical market stresses”. Throughout the SST, CCPs have managed to “comfortably absorb default losses and maintain higher liquidity balances”, and have improved across each component of the stress test relative to the previous exercise.
In its results report, BoE revealed that this second test “incorporates several new innovations” that were not in the first, “including an assessment of CCP resilience against more idiosyncratic shocks”. The SST comprised of four main components: the Credit Stress Test, Credit Reverse Stress Test, Liquidity Stress Test, and Clearing Member and Client Analysis. Each component was ”based on a hypothetical baseline market stress scenario, which represented a global economic downturn combined with a negative supply shock in commodities markets”. Three UK CCPS were involved – ICE Clear Europe, LCH, and LME Clear.
Overall improvement
Findings showed overall improvement compared to the first CCP SST. In the Credit Stress Test, for example, “all UK CCP clearing services have sufficient prefunded resources to comfortably absorb default losses… even when accounting for the cost of liquidating concentrated positions.” And each CCP also saw “less depletion of mutualised default fund contributions than in the bank’s previous CCP SST exercise”. This is despite the “more severe” baseline market stress scenario.
BoE clarified that the test was not “a pass-fail exercise”, a check for compliance with regulations, or an assessment of the quality of CCPs’ internal stress testing. Instead, it aimed to “identify any potential vulnerabilities and gaps in CCPs’ financial resilience, with the findings used to support and inform the bank’s supervisory and regulatory activities”.