The European Securities and Markets Authority (ESMA) announced on Thursday it will publish the the results of its first EU-wide stress test exercise regarding Central Counterparties (CCPs) on April 29.
The stress test assesses the resilience and safety of the European CCP sector and will focus on the counterparty credit risk that CCPs would face if multiple clearing members defaulted and they suffered simultaneous market shocks.
The tests will utilize three different default scenarios, combined with extreme market shocks based on a range of historical and hypothetical scenarios.
Regulators will also increase the number of defaulting firms to look for “extreme but plausible” scenarios that could impact the resilience of these counterparties.
The tests will also analyze the inter-dependency of CCPs, the concentration of CCP exposures, and the potential spill-over effects to firms that don’t default, ESMA notes.
“CCPs offer significant benefits to the market and play a key role in making derivatives markets safer. CCPs are also highly interconnected — both with financial institutions and markets — and the increasing volumes cleared through CCPs make them even more important for the financial system. Therefore, it is essential to test the sufficiency of their resources, not only individually but also at an EU-wide level,” says Steven Maijoor, chairman of the ESMA, in a statement.
“These stress tests are a crucial supervisory tool to ensure the sector is safe and resilient to shocks.”