The Bank of England (the Bank) has today launched its first public supervisory stress test (SST) of UK central counterparties (CCPs). The exercise will take place over 2021-22 with the clearing services of all UK CCPs (ICE Clear Europe Limited, LCH Limited, and LME Clear Limited) in scope.
As previously noted in the Bank’s Discussion Paper on CCP Supervisory Stress Testing, the 2021-22 supervisory stress test will explore the system-wide credit and liquidity resilience of UK CCPs. This will include examining the consequences of CCPs’ actions for other parts of the financial system and assessing the systemic effects associated with all UK CCPs responding to the same stress events at the same time. As the Bank’s first public CCP supervisory stress test, the exercise will be exploratory in nature; the findings from running the exercise will 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.
This test will include both a credit component and a liquidity component. The credit component will test the sufficiency of CCPs’ resources to withstand a combination of market stress scenarios and clearing member defaults. The liquidity component will test 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. 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 exercise will include the application of four market risk scenarios that are increasing in severity and are each linear functions of one another. The exercise will also be used to examine a range of default assumptions across both the credit and liquidity components. Reverse stress testing will be used to examine the impact of increasingly severe assumptions regarding market stress severity, concentration costs, and the number of defaulters on CCP resilience. Reverse stress testing will also be used to test combinations of assumptions that are likely to deplete CCP resources beyond normally accepted levels.
The exercise will apply to CCP resources, exposures and market prices as of the close of business on 17 September 2021. The stress test horizon is five days. The Bank intends to publish the findings of the 2021-22 SST exercise in the summer of 2022.