ESMA launches Fifth Stress Test Exercise for Central Counterparties

ESMA announced the launch of its fifth Stress Test Exercise for CCPs under EMIR.
This exercise aims to assess the resilience of CCPs and measure potential risks to the broader financial ecosystem. Fourteen CCPs authorized in the EU and two UK CCPs are included in the exercise.
The stress test framework includes several components: credit stress, concentration risk, liquidity stress, climate risk, and reverse stress. The credit stress component assesses CCPs‘ resources to absorb losses under market price shocks and member default scenarios. Concentration risk examines the impact of liquidation costs from concentrated positions. Liquidity stress assesses the sufficiency of CCPs‘ liquid resources under market price shocks and default scenarios. The climate risk component evaluates the effects of the transition to a carbon-neutral economy on CCPs‘ business models and collateral. The reverse stress test increases the severity of scenarios to identify breaking points for credit, concentration, and liquidity risks.
The stress scenarios used reflect extreme but plausible market conditions, developed in collaboration with the ECB and the ESRB. The data submitted by reporting entities will be validated and analyzed by ESMA and the NCAs, with the results scheduled to be published in a final report in the second half of 2024.
The stress test exercise is part of ESMA’s supervisory efforts to ensure the safety and resilience of CCPs and identify any potential shortcomings in their risk management. It aligns with the regulatory objectives of EMIR and the need to assess the impact of adverse market developments on CCPs. The stress test framework provides detailed methodologies for each component and outlines the implementation plan for the exercise.