The Bank of England (BoE) has today launched its first public supervisory stress test (SST) of UK central counterparties (CCPs) to take place over 2021-22 with the clearing services of all in-scope UK CCPs:
- ICE Clear Europe Limited
- LCH Limited
- LME Clear Limited
The SST will include:
- a credit component – testing the sufficiency of CCPs’ resources to withstand a combination of market stress scenarios and clearing member defaults;
- a liquidity component – testing the ability of CCPs to service all relevant cash requirements under a combination of market stress scenarios and the default and non-performance of clearing members and service providers;
- the application of four market risk scenarios that are increasing in severity and are each linear functions of one another;
- the examination of a range of default assumptions across both the credit and liquidity components;
- reverse stress testing to:
- examine the impact of increasingly severe assumptions regarding market stress severity, concentration costs, and the number of defaulters on CCP resilience; and
- test combinations of assumptions that are likely to deplete CCP resources beyond normally accepted levels.
Both the credit and liquidity component will include an examination of concentration costs in order to take into account the additional costs that might occur if CCPs liquidate large directional exposures into stressed markets in short periods of time.
The SST horizon is five days and will apply to CCP resources, exposures and market prices as of the close of business on 17 September 2021. BoE aims to publish its findings of the SST in the summer of 2022.