ESMA publishes framework for fourth central counterparty stress test

The European Securities and Markets Authority (ESMA) has announced the framework for the fourth version of its Stress Test for Central Counterparties (CCPs).

ESMA undertakes this exercise in order to examine the safety and resilience of recognised and EU and Tier 2 Third Country CCPs to hostile market developments as well as to identity shortcomings.

According to ESMA, the 2021 Stress Test focuses on addressing credit and concentration risks and uses ‘improved methodologies’ such as assessing the combination of concentration costs and credit losses when liquidating defaulting portfolios or including an intraday exercise for credit.

The newest stress test includes a credit stress test, reverse credit stress test, concentration risk test and an operational risk test. The ESMA will also conduct an analysis of CCPs’ resources and participants.

For this year’s tests, the European Central Bank collaborated with ESMA and the European Systemic Risk Board (ERSB) to develop a new narrative and calibrated the adverse scenario for the CCP Stress Test. This new introduction involves triggering one or more sources of systemic risk to the EU financial system as identified by the ERSB.

ESMA remarked the CCPs will be exposed to stress shocks defined by numerous risk factors across all relevant asset classes. The purpose of the test is to scrutinise a CCPs resilience to global macro-economic scenarios.

The publication of the final report and results are anticipated to take place in the second half of 2022.

CCP Supervisory Committee chair Klaus Löber said, “Last year demonstrated that financial systems are constantly evolving and subject to disruptions such as COVID-19 or Brexit. In that context, it is important to assess that EU CCPs, but also Third Country CCPs of systemic relevance to the EU (so-called Tier 2 CCPs), are resilient as key infrastructures for EU financial stability.

“In this respect, the ESMA CCP Stress Test is an essential supervisory tool that contributes to financial stability and supervisory convergence in the EU. In this 4th iteration of the CCP Stress Test, we have further developed the credit and concentration components from the last exercise to develop a more aggregated vision of both risks and introduced a new operational risk analysis with the aim of assessing risks from shared service providers.”

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