Last Friday, 2nd February 2018, the European Securities and Markets Authority (ESMA), published their results on their second stress test. This outcome was to check if Central Counterparties (CCP) will survive in economic turmoil, within different financial institutions. This second stress test aided in checking if the EU CCP system is able to withstand Clearing Member (CM) defaults and severe market shocks.

In 2016, the first CCP stress test has been conducted. During the first test, ESMA focused on the counterparty credit risk, whereas in the second exercise they included liquidity risks. By this, they have examined if CCPs would encounter any liquidity needs under different stress scenarios.

According, the Steven Maijoor, who chairs ESMA, the CCPs are low-risk entities. If CCP fails, then it has the potential to cause serious systemic risk, that is why it is important to test if the CCP is able to withstand different extreme market shocks.

Furthermore, Mr. Maijoor said that “I am pleased to see that EU CCPs have responded well to the rigorous scenarios used in conduction this second EU-wide stress test and are overall fit for purpose with sufficient resources to withstand severe market conditions.”

Results from the ESMA’s stress tests.

In the second CCP findings result that the EU CCPs are resilient having a developed stress methodology. To obtain its results for each individual CCP, to harmonize price shocks, ESMA selected the top-2 groups of CMs thus assuming results obtained for each individual CCP.

The concluding results did not detect any liquidity in the CCP. Moreover, no records found any major systematic risk.

Extreme market price shocks were tested.

To check CCPs vulnerability ESMA tested extreme price shocks. This enabled to provide scenarios that were being provided by the European Risk Board (ESRB). These market price shocks helped to identify, in every financial situation how CCP will react to them. The result was satisfying, having minor shocks to the financial institution. The stress test also monitored through credit and liquidity.

This stress test done by ESMA was beneficial so to help identify possible vulnerabilities and secure safety and resilience of the EU Central Counterparties (CCP). By the effect of the two stress tests conducted in both 2016 and 2017, it has resulted that the Central Counterparties will survive in any financial turmoil may it happen in the coming years.

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