The European Securities and Markets Authority publishes the main outcomes of its 2023 global CCPs fire drill. The most important outcome is that no major bottlenecks were identified even though a number of areas for improvements were identified. While a fire drill is only a simulation of a real crisis event, this shows that the industry is actively preparing to deal with major default management processes.
Clearing members and their clients indicated that, in general, they were able to cope with the default of a material clearing member at multiple CCPs. However, some of them also indicated the need to prioritize some auctions over others due to resource constraints, which led to mandatory auctions being prioritized, potentially resulting in less bids in non-mandatory auctions.
Third, a large number of respondents noted standardization and automation as ways to reduce operational risk in CCP default management processes. For example, some respondents indicated the use of default-management portals (instead of email communication). Portals and other tools could reduce operational risk if the tools used are reliable, user-friendly and support market practices.
Fourth, specifically regarding the hedging and auction process, some respondents noted the need for careful consideration of the level of hedging and the size and nature of the auction portfolios as ways to reduce the risk level of the portfolio and improve auction results. The possibility for CCPs to provide end of day or intraday pricing of auction portfolios to bidders as a control against erroneous pricing was also mentioned.
Clearing members and their clients also noted the need for orderly execution of the auction within a short bidding window with “firm” prices and immediate confirmation of both winners and losers. The need for timely communication on timelines of auction processes by CCPs and ensuring that the liquidation of the portfolio is performed during market opening hours was also mentioned as a point for improvement.