The European Securities and Market Authority (ESMA) has released a follow-up report with the main outcomes of the global central counterparty (CCP) fire drill, conducted in November 2023. The exercise involved over 30 global CCPs running a simulation of their default management processes and was jointly coordinated by ESMA, EU and non-EU authorities, and the CCP industry association.

CCPs executed the exercise at the same time to be able to identify potential operational bottlenecks in their procedures, such as the fact that non-defaulting clearing members of multiple CCPs may be solicited at the same time.

Resource constraints

The fire drill highlighted no major bottlenecks, though areas for enhancement were noted. While most clearing members and clients coped adequately with material clearing member defaults across multiple CCPs, some faced challenges due to resource constraints. ESMA reports that this led to prioritisation of mandatory auctions, potentially affecting non-mandatory ones.

PostTrade 360 Nordic 2024

Participants’ feedback highlights the importance of standardisation and automation in reducing operational risks. Moreover, they suggest thorough consideration of hedging levels and the characteristics of auction portfolios within the hedging and auction process. Respondents advocate for standardised formats, communication methods, and timelines across CCPs as well as comprehensive documentation and post-mortem exercises.

The next global CCP fire drill is planned for 2025 and aims to expand the participation scope, potentially involving emerging markets CCPs.