BoE launches CCP supervisory stress test
20 October 2021 UK
Image: AdobeStock/Alexey Fedorenko
The Bank of England has launched its first public supervisory stress test of UK central counterparties (CCPs).
This supervisory stress test (SST) will be conducted during 2021 and 2022 and will apply to UK-registered CCPs, notably ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd.
This exercise will explore the resilience of UK CCPs in response to system-wide credit and liquidity risk challenges, along with implications of these stresses for wider parts of the financial system.
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.
The testing process will apply four market risk scenarios with 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.
This will also model the degree to which CCP resources become depleted, beyond normally accepted levels, under different stress conditions.
This supervisory stress test (SST) will be conducted during 2021 and 2022 and will apply to UK-registered CCPs, notably ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd.
This exercise will explore the resilience of UK CCPs in response to system-wide credit and liquidity risk challenges, along with implications of these stresses for wider parts of the financial system.
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.
The testing process will apply four market risk scenarios with 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.
This will also model the degree to which CCP resources become depleted, beyond normally accepted levels, under different stress conditions.
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