Launch of the scenario phase of the system-wide exploratory scenario

The Bank of England has launched the scenario phase of the system-wide exploratory scenario.
Published on 10 November 2023

The Bank of England has launched the scenario phase of the system-wide exploratory scenario.

The Bank launched the system-wide exploratory scenario (SWES) in June 2023 to understand better how UK financial markets core to UK financial stability function under stress. The SWES consists of two phases: information gathering and scenario. We have now begun the scenario phase of the SWES and have sent participants a hypothetical stress scenario that incorporates severe, but plausible, 10-day shocks to rates and risky asset prices. The severity of the aggregate shock in these paths is faster, wider ranging, and more persistent than observed both in the March 2020 ‘dash for cash’ and September/October 2022 LDI (Liability Driven Investment) episodes.

We aim to use participants’ responses to the first part of the scenario phase to improve our understanding of a range of issues around market functioning. For non-bank financial institutions (NBFIs) we are focussing this round on how their liquidity needs change as a result of our hypothetical scenario and what actions they take in response. We will also focus on the role of banks – for example how their appetite for counterparty credit risk and willingness to intermediate markets affects functioning – and central counterparties (CCPs) in the stress.

We have sent participants scenario documentation, response templates, and guidance. We expect their responses by January 2024. We expect to run a second round of the scenario phase through 2024 and intend to publish our final report on SWES findings by end-2024.

Background to the scenario phase of the SWES

Background to the SWES

The Bank launched the SWES in June 2023 to understand better how core UK financial markets function under stress.

Through asking participants (as defined below) to model the impact of a hypothetical scenario on their business and the actions they take in response, the SWES aims to:

  • enhance our understanding of the risks to and from NBFIs, the behaviour of NBFIs and banks in a stress, including what drives the behaviours; and
  • investigate how these behaviours, interactions between them, and other market dynamics can amplify shocks in markets and potentially pose risks to UK financial stability.

The SWES hypothetical scenario is not a forecast by the Bank, nor does it represent the Bank’s expectations of the consequences for financial markets of such a shock. The SWES scenario is a tool to allow the Bank to explore the impact of such a shock on a range of market participants.

To that end, the SWES is being run as a collaborative exercise and more than 50 participants that are active in UK financial markets – including large banks, insurers, central counterparties, asset managers, hedge funds, and pension funds – are taking part. Further detail on the overarching objectives of the SWES and the SWES participants can be found on the SWES launch page.

We have now begun the scenario phase of the exercise, and we have launched Round 1 of the engagement with SWES participants.

The SWES is split into two phases: an information gathering phase and a scenario phase. We have now concluded the information gathering phase and are moving into Round 1 of the scenario phase. We are planning a further – iterative – Round 2 of the scenario phase, which will be informed by SWES participants’ responses to Round 1 (Figure 1).

Figure 1: The SWES is split over two phases

Progress on the SWES and projected forward timeline

A timeline showing the evolution of the SWES from public launch in June 2023 to its expected conclusion in Q4 2024. Boxes in the timeline highlight intermediate stages such as round 1 of the scenario phase starting in November 2023, participants submitting responses to this round in January 2024 and round 2 of the scenario phase starting and ending in Q2 2024 and Q3 2024 respectively.

Engagement with industry and other regulators as the SWES develops

We have worked closely with participants and regulators to inform the design of the SWES including through industry engagement and the targeted information gathering phase.

The SWES is the first exercise of its kind, and we are approaching it collaboratively with the SWES participants. We have, for example, made extensive use of feedback from the SWES participants to help design the SWES scenario we have launched.

For instance, as part of the information gathering phase, we received information from participants on: their business and outstanding exposures in the SWES markets of focus, sensitivities to a range of market risk factors, and their waterfall of actions to source liquidity during market stress. We have supplemented this information through conversations with participants, as well as an intelligence-gathering exercise with non-SWES market participants. The information and data from these exercises has helped us design a scenario that should generate significant liquidity redistribution across the financial system.

We are working closely with the Financial Conduct Authority, The Pensions Regulator, as well as other domestic and international regulators on the SWES.

Overview of Round 1 of the scenario phase

Round 1 objectives and components of the hypothetical scenario

The aggregate shock in the hypothetical SWES scenario is faster, wider ranging, and more persistent than those observed in recent market events.

During the scenario phase, we are asking SWES participants to consider the impact of a hypothetical stress scenario, tell us how it would impact their business, and the actions they would take in response. To meet our overarching SWES objective, the hypothetical scenario needs to result in a significant redistribution of liquidity. Therefore, the scenario presents a shock to global financial markets, incorporating severe but plausible shocks to a wide range of market prices and indicators over 10 business days. The majority of the market moves occur in days 1–3 of the scenario. Participants should not assume any extraordinary policy intervention by UK or international authorities during the scenario horizon.

The hypothetical SWES scenario incorporates shocks to a range of different financial market variables. The variable path spreadsheet sets out quantitative price paths for each variable, and the key 10-day shocks encompassed in the scenario are summarised in Chart 1.

Chart 1: The SWES hypothetical scenario combines shocks to rates and risky asset prices

Comparison of 10-day moves in selected SWES variables against the largest observed since 2001, and those observed during the dash for cash and LDI episodes (a) (b)

A series of rings show how the shocks incorporated in the SWES scenario compare to those experience in both the March 2020 dash for cash and September/October 2023 LDI episode. The chart shows that the shocks to gilt yields are about as severe as those observed during the LDI episode and the shocks to corporate bonds are around as severe as those observed during the dash for cash.


  • Sources: Bank of England, Bloomberg Finance L.P, Board of Governors of the Federal Reserve System (US), Refinitiv Eikon from London Stock Exchange Group and Bank calculations.
  • (a) The gilt yield, US Treasury yield, corporate bond, and equity back data start from 1 January 2000. The back data for all gilt yields includes September 2022, when yields peaked unusually sharply.
  • (b) The increase in yields on US Treasuries is similar to that applied to all non-UK advanced economy government debt of similar maturity. This figure displays yields on 10-year US Treasury yields for indicative purposes.

The shocks in the hypothetical SWES scenario incorporate many elements from recent market events. For example, the shock to yields on 10-year gilts (both nominal and index-linked) are roughly 90% of the severity of those observed during the September/October 2022 LDI episode. The scenario also includes some elements from the March 2020 dash for cash, in particular the shock to sterling investment-grade corporate bond spreads. Furthermore, the scenario incorporates global shocks such as a shock to yields on 10-year US Treasury notes comparable to the largest historically observed.

The severity of the individual shocks in the hypothetical SWES scenario is augmented by three further factors.

First, the combination of individual shocks results in an aggregate shock more severe than those observed in historical episodes. The global shocks in the SWES scenario are more wide ranging than in recent episodes, for example the scenario combines some of the fixed-income shocks from the September/October 2022 LDI episode with the shock to corporate bond spreads in the March 2020 dash for cash episode.

Second, the speed of the shock, as the sharpest price moves take place in the early part of the 10-day scenario horizon. For instance, the Day 1 increase in yields on 10-year nominal gilts is faster than any historical observation since 2001.

Overall, the aggregate shock is more severe than observed in the dash for cash and the LDI episodes as it is composed of shocks that are largely faster, wider ranging, and more persistent than observed in these events.

We are also providing participants with a narrative that explains the catalyst for the scenario and its consequences for financial markets. The narrative particularly emphasises the inherent uncertainty in the hypothetical scenario and the expectation of longer-term shocks to economic fundamentals. These elements should help ensure SWES participants’ responses are realistic in a context of heightened and protracted uncertainty but are difficult to quantify in short-term price paths alone.

Expected impact of the hypothetical scenario on SWES participants, and their responses

For NBFIs, Round 1 of the scenario phase focusses on understanding their liquidity needs in the hypothetical scenario, and the actions they take in response.

Using data received during the information gathering phase, we have estimated how a range of shocks could impact on NBFI participants’ business and the actions they could take in response. We expect that the main drivers of these participants’ liquidity needs in our hypothetical scenario will arise from three main channels:

  • increases in collateral calls through additional variation margin calls and/or increases in initial margin;
  • revaluations of collateral, for example that is posted for securities financing transactions resulting in a need to post additional collateral; and
  • funds facing redemptions from other market participants (including other SWES participants) who are seeking to meet their own liquidity needs.

We expect some NBFI participants will either need to take action to replenish their liquidity or will choose to do so for precautionary reasons. We expect many will need to take actions based on their investment mandates in response to the shock. The sharp initial shock in the scenario exacerbates the liquidity need, as some options (such as withdrawing from funds with longer redemption periods) will be unavailable to participants. And uncertainty embedded in the hypothetical scenario will allow us to explore how firms may be more likely to take precautionary actions such as selling assets to generate liquidity in anticipation of heightened demand through the channels set out above.

We aim to understand how the combination of banks’ and NBFIs’ behaviours during a stress could affect wider UK financial stability, particularly the resilience of the SWES markets of focus.

The SWES will also examine the role that banks and CCPs play in both demanding liquidity from, and supplying it to, other SWES participants.

We will also examine the role of banks and CCPs in the SWES markets of focus during a stress. We will examine how the hypothetical SWES scenario affects banks willingness to act as intermediaries in these markets and provide financing to the wider financial system. We will also be asking CCPs for information on the impact of the stress, their role in issuing margin calls, and how they might reinvest some of the margin received. Figure 2 shows the key transmission channels we aim to investigate further through SWES participants’ responses.

Figure 2: Responses from across the SWES participants should help explore a range of financial market transmission channels

Key transmission channels we intend to explore through SWES participants’ responses

This diagram shows how an initial shock impacts on NBFIs - the decisions they take in response, and how these impacts and decisions are affected by bank and CCP behaviour. It also shows how NBFI decisions can then loop back and amplify the original shock.

Next steps for the SWES

SWES participants are now considering the scenario and will be submitting their responses in January 2024, we expect to publish a final report on the SWES by end-2024.

Participants will take their funds/balance sheets as of close of business 31 October 2023 as the start point of our hypothetical scenario. They will then apply the shocks in the scenario and provide us with the impacts on their business, and the actions they take in response.

We expect to receive participants’ responses in January 2024, at which point we will begin analysing and feeding them in to the design of Round 2 of the scenario phase. This will involve:

  • Understanding how individual SWES participants’ behaviours combine to interact with the SWES markets of focus. We may then update the severity of the price paths in the hypothetical SWES scenario for Round 2, if warranted.
  • Considering how much individual participants rely on other SWES participants to execute their planned actions, and whether these actions are credible given the submissions from other relevant participants. For instance, we may consider whether to introduce a constraint around banks being unwilling to provide enough financing to satisfy NBFI participants’ liquidity needs in the second round of the scenario phase.
  • Reflecting our aim to make the exercise as realistic as possible, we may inject additional uncertainty in the hypothetical scenario. For example, by adding more information consistent with how this type of scenario evolves in the Round 2 narrative.

We expect to publish a final report on the SWES results by end-2024 that will summarise system-wide (including sectoral) findings, their implications for the SWES markets of focus, and any conclusions for our assessment of risks to UK financial stability. We also expect to share interim results and updates via standard Bank/Financial Policy Committee communication channels such as Financial Stability Reports. Published materials will not provide information on individual firms or any commercially sensitive information.


This page was last updated 01 December 2023