Last month, the European Securities and Markets Authority (ESMA) announced the outcome of its first EU-wide stress testing exercise that covered 17 of the EU’s largest clearinghouses (central counterparties; CCPs). In a report titled ESMA Stress Tests Underscore The Likely Resilience Of EU Clearinghouses But Do Not Offer A Clean Bill Of Health that was published on the second half of May, S&P Global Ratings comments on the usefulness of this exercise, the assumptions used, and the implications of ESMA’s findings.
They mention that the test focused narrowly on each CCP’s ability to withstand the counterparty credit risk that it could face as a result of multiple clearing member defaults and simultaneous severe market price shocks. The publicly communicated results cited broad findings, on a no-names basis. Nevertheless, S&P Global Ratings recognizes that this is the first such multi-CCP exercise that, to their knowledge, any CCP regulator has conducted.
“We regard it as a thoughtful and useful exercise that aids transparency in the sector, in an area where external parties can sometimes struggle to make a comparative assessment,” said S&P Global Ratings analyst Giles Edwards. “It could also serve as a catalyst to further enhance risk management standards at some EU CCPs, and ensure better consistency and comparability of CCPs’ individual stress testing methodologies.”
For S&P Global Ratings, the results of these exercises add further information, on top of their other surveillance, on the likely adequacy of a CCP’s financial resources within the waterfall. Their views of CCP creditworthiness continue to take into account other inputs, such as a CCP’s ownership structure, liquidity in a member default scenario, profitability and leverage, and sustainability as a business.
“While it was a narrowly focused exercise and identified some weaknesses, overall the results confirm our view that EU CCP regulation and supervision generally ensure a satisfactory baseline standard of CCP risk management,” said Edwards. “Looking forward, we anticipate that these stress testing exercises will become a regular fixture of regulatory oversight of CCPs in the EU and, potentially, beyond.”