The Bank of England has launched its first public supervisory stress testing (SST) of the resilience of the three central counterparties (CCPs) operating in the UK – ICE Clear Europe, LCH, and LME Clear.
The tests will focus on their ability to withstand credit and liquidity shocks in four scenarios of increasing severity.
Reverse stress testing will be used to evaluate CCP resilience in the face of a combination of market stress scenarios, clearing member default and concentration costs.
Initial testing will be exploratory in nature, used alongside industry feedback to the Bank’s discussion paper on CCP supervisory stress testing to refine its SST regime and methodology.
The credit risk element in the SST exercise will evaluate whether CCPs’ resources can withstand s combination of market stress scenarios and the default of clearing members. This will include situations where all UK CCPs are responding to the same stress situations at the same time.
The liquidity risk component will test CCPs’ ability to meet all of their cash requirements in a combination of market stress situations and the “non-performance” of clearing members and service providers.
This will factor in concentration costs that may result if CCPs liquidate large directional exposures simultaneously into already stressed markets.
This will also model the degree to which CCP resources become depleted, beyond normally accepted levels, under different stress conditions.
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