ESMA: CCP stress test results show gaps in concentration risk, increase in margin

The European Securities and Markets Authority (ESMA) published the results of its fifth stress test exercise for Central Counterparties (CCPs). The results confirm the overall resilience of European Union (EU) CCPs, as well as third-country Tier 2 CCPs, to core credit and liquidity financial risks under the tested scenarios.

Klaus Löber, chair of the CCP Supervisory Committee, said in a statement: “ESMA’s fifth stress test confirmed the overall resilience of the European clearing landscape to severe credit and liquidity stress scenarios. However, we still have identified areas in which certain CCPs may need to strengthen their risk management frameworks, or where further supervisory work should be prioritized, including on modelling of concentration.”

At system-wide level, ESMA’s concentration analysis shows that concentrated positions have the potential for generating significant liquidation costs for CCPs. This risk is not uniformly distributed across the system but is especially relevant at one or a small cluster of CCPs dominating each asset class.

The largest concentration risk can be found in interest rate derivatives, modelled at around 33 billion ($35.7bn) of market impact on liquidation. Bonds (including positions from repo clearing services) come next with €11 billion. Concentration in commodity derivatives and in the equity segment (securities and derivatives) is very significant as well, with respectively around €9 billion and €4 billion of modelled market impact.

Another notable outcome of the test was the significant increase in the total amount of required margin, which rose by 56% compared to the previous exercise.

Jo Burnham, a margin expert at OpenGamma, said in emailed commentary: “A substantial 56% rise in required margin indicates the higher level of resources needed by CCPs to safeguard against potential market shocks. This increase reflects the importance of market participants calculating ‘what-if margins’ to understand future funding levels. Comparing requirements at alternative venues with a view to optimizing margin frees up previously tied capital, maximizing returns.”

Key findings:

  • CCPs have robust lines of defense to withstand significant market shocks in combination with the default of the two clearing member groups with the largest exposures;
  • CCPs are also resilient to substantial liquidity stress events, while CCPs’ clearing, and investment activities play a key role in the results;
  • Some gaps persist in the coverage of concentration risk across CCPs and across asset classes, notably for commodity derivative positions;
  • For climate risk, CCPs’ exposures depend on whether the markets they clear are directly exposed to transition risk, such as commodities and energy. The majority of sampled CCPs have started to integrate climate risk into their stress testing framework;
  • The ecosystem analysis provided insights into the CCPs’ and clearing members’ resources and showed that the total amount of required margin increased by 56% compared to the last exercise.

A total of 16 CCPs were covered by the exercise, including two UK CCPs qualifying as Tier 2 CCPs and all authorized EU CCPs. It assessed credit and concentration risk, liquidity risk, and included a new climate risk component. The exercise was complemented by an enhanced clearing ecosystem analysis. The exercise also included additional market stress scenarios, enhanced model risk assessments for concentration, and extended reverse stress tests for credit and liquidity.

Read the full results

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