Adverse scenario for the European Securities and Markets Authority’s 2023 central counterparty stress test

The European Systemic Risk Board, ESRB, has published the latest macro-financial scenarios to be used by central counterparties (CCPs) for the 2023 EU-wide CCP stress test. The scenarios were developed by the ESRB’s Task Force on Stress Testing in cooperation with the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA) and were recently sent to ESMA for application.
#### In brief, the scenarios encompass the following (negative) expectations on market development:
In view of the ongoing geopolitical tensions caused by Russia’s invasion of Ukraine and an expected resurgence of COVID-19, the scenarios simulate further disruptions in the global supply chain, leading to commodity shortages and higher prices. These supply shortages raise production costs, which are partially passed on to consumers, resulting in widespread inflation. Inflation, in turn, triggers expectations of policy responses, leading to higher market interest rates. Additionally, increased public spending during the pandemic has raised concerns about sovereign debt sustainability, while higher credit costs and a weaker economic outlook increase expectations of defaults in the private sector. These concerns drive up credit risk premiums and credit spreads globally. The tightening of financing conditions worsens the economic outlook, leading in turn to volatility in the financial markets and sharp corrections in asset prices.
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To derive the adverse scenario outcomes, firms must calculate the reaction of individual variables given a particular strain imposed on chosen triggers, considering a time frame of either two days or five days (depending on the asset class). The calibration process utilizes a sample spanning from January 2008 to December 2022.