ESMA to conduct first EU-wide CCP stress test

ESMA to conduct first EU-wide CCP stress test

Do not invest more money than you can afford to lose.


The European Securities and Markets Authority (ESMA) said on Thursday it will announce on 29 April, 2016, the results of its first stress testing for Central Counterparties (CCPs). The stress test will be conducted across the EU and is falls under the European Markets Infrastructure Regulation (EMIR).

The initiative aims to assess the resilience and safety of EU CCPs and to identify possible vulnerabilities. The results of stress test will be announced in an aggregated and anonymized manner.

CCP are clearing houses, usually European ones, that mediate in the trading on the European derivatives and equities markets and that impose themselves as the legal counterparty to every trade, meaning that they are the buyer to every seller and the seller to every buyer.

During the stress testing, EU CCPs will be exposed to adverse market scenarios so that their resilience could be measured. The focus of the testing process will be the counterparty credit risk that CCPs would face as a result of multiple clearing member (CM) defaults and simultaneous market price shocks. CCPs will face three different default scenarios, which will be complemented by an additional with extreme market price shocks scenario and an analysis of the inter-dependency of CCPs through common CMs, the concentration of CCPs exposures and the potential spill-over effects to non-defaulting CMs triggered by the loss absorption mechanism of CCPs.

In addition, CCP will also be tested tested against a set of reverse stress scenarios by further increasing the number of defaulting CMs in order to look for extreme but plausible scenarios that could have a significant impact on the resilience of EU CCPs.

“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,” ESMA chairman Steven Maijoor said. “Therefore, it is essential to test the sufficiency of their resources, not only individually but also at an EU-wide level. These stress tests are a crucial supervisory tool to ensure the sector is safe and resilient to shocks,” he added.

Here is more information about the three types of default scenarios EU CCPs will go through:

  • of the two CMs with the largest exposures per CCP, taking into account the common membership across CCPs;
  • the default of the two groups of CMs EU-wide with the largest aggregate exposures; and
  • the default of the two groups of CMs EU-wide with the largest aggregate exposures weighted by their probability of default.

ESMA will cooperate with the National Competent Authorities (NCAs) and the European Systemic Risk Board (ESRB) for the implementation of the CCP stress test process.

The ESMA is an independent EU authority that directly supervises and safeguards the EU financial markets. It has established a single rulebook for EU financial markets and promotes the convergence of the regulatory bodies of EU countries. In addition, it also assesses risks to investors, markets and financial stability.

In the EU, a financial service license issued by any member state applies to the markets of all other EU countries. However, in case of misconduct entities are supervised and penalized by the authorities under which regulation they fall. EU forex brokers predominately choose to be regulated in Cyprus or the UK.

Source: ESMA


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