The Bank of England (BoE) has outlined the framework for its 2024 supervisory stress test (SST). The test aims to asses the resilience of UK central counterparties (CCPs) and to promote transparency and confidence in the UK clearing system. The SST will scrutinise the clearing services of all three UK authorised CCPs: ICE Clear Europe, LCH and LME Clear.

This year’s test will concentrate on two core components: the credit stress test and the credit reverse stress test. The former evaluates whether CCPs possess adequate financial resources to absorb losses in the event of market stress scenarios, coupled with the simultaneous default of certain clearing member groups. Meanwhile, the latter examines the impact of escalating input assumptions on CCP resilience, pinpointing combinations that could deplete CCPs’ financial resources.

Unlike previous CCP SST exercises, the 2024 test will exclude a liquidity stress test component and analysis of how CCP actions affect their clearing member population and clients. Instead, BoE cites coverage from prior exercises and ongoing reviews.

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The test will be anchored by a “Baseline Market Stress Scenario”, designed by the BoE. “This scenario is an extreme but plausible hypothetical scenario, calibrated to a level of severity broadly equivalent to the worst historical shock for each CCP clearing service”, explains the bank. Additionally, BoE will introduce three “multiplier” scenarios and extend previous stress tests to explore a broader spectrum of market stress scenarios.

The 2024 CCP SST will use a reference date of end of day Friday 22 March 2024, applying market price shocks to positions and resources as of that date. All three UK authorised CCPs are mandated to furnish relevant data for the test. BoE intends to publish the results in Q4 2024.