The Bank of England has today published the results of its first public supervisory stress-test of UK central counterparties (CCPs). The exercise took place over 2021-22 with the clearing services of all UK CCPs, ICE Clear Europe Limited, LCH Limited, and LME Clear Limited, in scope.
The exercise assessed the credit and liquidity resilience of these CCPs under a severe market stress scenario and the simultaneous default of selected clearing member groups. It was exploratory in nature, aiming to identify potential vulnerabilities or gaps in resilience, rather than testing CCPs against a pass-fail threshold.
The severe market stress scenario consisted of shocks to the prices of a wide range of products cleared by the UK CCPs, and was designed to be at the limits of historical observations.
The findings showed that the UK CCPs were resilient to this market stress scenario and the simultaneous default of the two clearing member groups who, in defaulting, create the largest losses or most negative liquidity balances. While results vary across CCPs, no CCP experienced full depletion of prefunded financial resources or a negative liquidity balance.
The exercise also included a reverse stress test where CCPs are subjected to combinations of increasingly severe assumptions to identify what might fully deplete their prefunded and non-prefunded resources.
The findings will now be used in conjunction with feedback to the Bank’s Discussion Paper on CCP supervisory stress-testing to help further develop and refine the Bank’s CCP supervisory stress-testing regime. The Bank intends to publish a final framework document for CCP supervisory stress-testing in the course of 2023.
Sir Jon Cunliffe, Deputy Governor for Financial Stability, said:
“The conclusion of the Bank’s first public CCP stress-test marks a major milestone in the development in the supervision and regulation of CCPs. While the stress test was exploratory, with no pass-fail assessments, the results are evidence of the overall resilience of the UK CCPs.
We will engage these CCPs on our findings, which will help the Bank target its supervision and inform CCPs’ approach to risk management. This stress test supports our commitment, in line with the UK's status as a global financial centre, to regulating CCPs with due transparency and in line with international best practice.”
As noted in the Financial Policy Committee (FPC) Record published on 12 October, the FPC discussed the results of this stress-test at its Policy meeting on 30 September 2022. The Record of that discussion follows below:
The FPC welcomed the publication of the results of the Bank’s first public supervisory stress-test of UK CCPs. The FPC noted that the results of this exercise demonstrated that UK CCPs were resilient from both a credit and liquidity perspective to the Bank’s bespoke severe market stress scenario and the simultaneous default of the two Clearing Member groups whose default has the greatest impact on each UK CCP or CCP Clearing Service.