ESMA launches consultation on climate risk stress testing for CCPs

The European Securities and Markets Authority (ESMA) has launched a consultation on a proposed climate risk stress testing methodology for central counterparties (CCPs) or clearing houses.

While it has started developing a framework, ESMA notes that the assessment of climate risk within individual CCPs is still in its infancy, and that no cross-CCP climate stress test has been carried out to this date in any jurisdiction.

The consultation is looking for input on a proposed classification of climate risks relevant to CCPs, the methodology to build an EU-wide climate risk stress testing framework for CCPs, how to best calibrate the stress tests, and the current development of climate risk assessments by CCPs

ESMA has identified four different elements of climate risk that may adversely impact CCPs. The first is physical risk from weather-related hazards, which could affect CCPs’ physical premises, the premises of their clearing members, and/or those of their service providers.

These factors would impair CCP functioning and operations as well as clearing member creditworthiness

The second is rapid transition risk, which could arise when investors shift portfolio allocations or divest from certain assets, thereby causing volatility spikes and possible clearing member defaults, which would affect the CCP

Next on the list is business risk, which could impact a CCP if its clearing activities are linked in part or in full to “brown” assets or activities such as specific commodity or type of energy contract. This could result is falling volumes of transactions earnings over time

Last but not least is collateral replacement risk, which could play out when the assets used as collateral degrade in value due to a transition away from environmentally damaging issuers. This would mean the CCP may require additional collateral to be posted

The consultation is open for comment until 21 April 2022.

©Markets Media Europe 2022

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