2021–22 CCP Supervisory Stress Test: results report

1: Foreword

The conclusion of the Bank of England’s (Bank’s) first public Central Counterparty (CCP) Supervisory Stress Test (SST) marks a major milestone in the development of the Bank’s CCP Supervisory Stress-Testing regime, of our supervision and regulation of CCPs, and in the attainment of the Bank’s broader financial stability objectives.

UK CCPs are large and complex, and sit at the centre of the UK and global financial system. Their resilience is a global public good. Market volatility over the past year has demonstrated how important the resilience of the UK clearing network is to financial stability in the UK and abroad.

Supervisory stress tests have an important role to play in assessing resilience, providing transparency and promoting confidence. The stress-testing methodology that the Bank is developing allows us to explore a wide range of risks to UK CCPs, and test their resilience under a multitude of extreme circumstances. It enables the Bank to deploy a series of innovative approaches to examining risks at individual CCPs and across the UK clearing network.

The 2021–22 CCP SST is the first test of this kind that the Bank has carried out and is exploratory, with no pass-fail assessments. The results confirm the resilience of the UK CCPs to market stress scenarios that overall are of equal and greater severity than the worst historical market stresses. Each UK CCP has sufficient prefunded financial resources to absorb losses arising from the default of numerous different combinations of Clearing Members – from the largest pair to a more numerous combination of smaller entities – in a severe market stress scenario at the limits of historical experience. Further, in this same market stress scenario, each CCP maintains a positive liquidity balance under the default of the Cover-2 population. By intentionally testing CCPs against stress events more severe than historical precedence or regulatory requirements – so called ‘reverse stress tests’ – the Bank has enhanced its understanding of CCP resilience and what would be required to deplete CCPs’ financial resources. This information will help the Bank target its supervision and CCPs focus their risk management.

The findings from this exercise will inform the Bank’s ongoing supervisory and regulatory work, at both the domestic and international level. The Bank will continue developing its stress-testing framework, building on the experience gained in the 2021–22 test for the development of our next text. We will publish our CCP stress-testing framework during the course of 2023.

Sir Jon Cunliffe, Deputy Governor Financial Stability

2: Executive summary

In October 2021, the Bank announced the launch of the 2021–22 Supervisory Stress Test (SST) of UK Central Counterparties (CCPs) (the 2021–22 CCP SST). This exercise is the Bank’s first public CCP SST, and follows the Bank’s (non-public) pilot CCP SST exercise in 2019, the publication of the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties, and the Bank’s participation in the European Securities and Markets Authority’s (ESMA) EU-wide CCP Stress-Test exercises.

Purpose and design

This exercise is exploratory in nature. It aims to identify potential vulnerabilities and gaps in CCP resilience, rather than testing CCPs against particular pass-fail thresholds. The findings will be used to support and inform the Bank’s supervisory and regulatory activities. The lessons from running this exercise will also be used to support the continued development of the Bank’s framework for CCP supervisory stress testing, in conjunction with the feedback received on the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties.

The 2021–22 CCP SST exercise was launched in October 2021. It explores the individual and system-wide credit and liquidity resilience of the three UK CCPs (ICE Clear Europe Limited (ICEU), LCH Limited (LCH), and LME Clear Limited (LMEC)) and each of their Clearing Services. In particular, the impact on CCPs’ financial and liquidity resources is examined under a combined baseline severe financial market stress scenario (the ‘Baseline Market Stress Scenario’) plus the simultaneous default of selected Clearing Member groups (including in their capacity as service providers). The selected Clearing Member default scenarios include, but are not limited to, the default of the Cover-2^{footnote [1]} population at each CCP Clearing Service. The exercise also explores the impacts of this Baseline Market Stress Scenario and the default of certain groups of Clearing Members on the non-defaulting Clearing Member and client populations at the UK CCPs.

The Baseline Market Stress Scenario consists of shocks to the prices of a wide range of products cleared by the UK CCPs. It is calibrated to be broadly equivalent in overall severity to the worst historical market stress scenario for each UK CCP Clearing Service (as at the time of the launch of this exercise in October 2021). This scenario does not – and cannot – cover all possible sizes and combinations of market price shocks to which CCPs could be exposed. For example, the scenario is not focused on large hypothetical shocks that go far beyond historical limits in specifically selected asset classes or products.

In addition, sensitivity analysis and reverse stress-testing techniques are used to test CCP resilience against increasingly conservative assumptions. Reverse stress testing is used to evaluate CCPs’ resilience to increasingly challenging combinations of assumptions that are intentionally well beyond historical precedence and regulatory requirements,^{footnote [2]} and in combination are extremely severe. This includes an examination of CCP resilience against additional market stress scenarios that overall are more severe than those historically observed and contain individual market shocks greater than historically observed for a variety of products.

The analytical components of the 2021–22 CCP SST are explained in Section 3 and summarised in Figure 1.

Results and findings

Overall, the UK CCPs are resilient to the Baseline Market Stress Scenario and simultaneous default of the Cover-2 population, from both a credit and liquidity perspective. In the Credit Stress Test component of this exercise, none of the UK CCPs’ Clearing Services experience full depletion of prefunded financial resources.^{footnote [3]} Similarly, in the Liquidity Stress Test component of this exercise, no UK CCP experiences a negative liquidity balance at any point in the five-day stress-test window under the central assumptions, either at an aggregate currency level or either pound sterling (GBP), US dollar (USD) and euro (EUR).

Credit Stress Test

In the Baseline Market Stress Scenario, none of the UK CCPs’ Clearing Services experience full depletion of prefunded financial resources. However, results vary significantly across the CCPs and their Clearing Services. For some Clearing Services defaulting Clearing Members’ own resources are sufficient to meet losses, without drawing on the Default Fund. Other Clearing Services experience low or moderate depletion of prefunded resources. For one CCP Clearing Service (LME Base), losses result in close to full depletion of the Default Fund when the Bank’s estimates of concentration costs are included.^{footnote [4]}

Prior to the conclusion of the 2021–22 CCP SST, there have been very large shocks in the price of nickel – outside of historical experience – resulting in a very severe stress for LME Base in March 2022. The Bank has launched a review (including the use of a skilled person review) into the operation of LMEC during March 2022, to determine what lessons might be learned in relation to its governance and risk management.^{footnote [5]}

The Credit Stress Test results also show that the degree of resilience of most CCP Clearing Services is sensitive to assumptions regarding CCPs’ ability or inability to successfully transfer (port) client accounts at defaulting Clearing Members to non-defaulting Clearing Members. While porting successfully during a default event may be challenging, the results show there are material benefits if porting can be executed effectively at Clearing Services where client clearing represents a greater share of clearing activity. For some Clearing Services, these benefits are observed when segregated client accounts are assumed to successfully port, while for others they arise when all client accounts (including gross and net omnibus accounts) are assumed to successfully port. The recently published CPMI-IOSCO report, ‘Client clearing: access and portability’, set out a range of potentially effective porting practices, and called for development of further effective practices to facilitate porting. The Bank intends to continue analysis and exploration of porting in future CCP supervisory stress tests, as well as through other regulatory activities.

Credit Reverse Stress Test

In the Credit Reverse Stress Test, CCPs are subjected to an increasingly challenging combination of assumptions to identify what might fully deplete their prefunded and non-prefunded resources. These assumptions are intentionally well beyond historical experience and regulatory requirements, and in combination are extremely severe.

No CCP Clearing Service experiences a full depletion of both prefunded and non-prefunded resources in the Standard Credit Reverse Stress Test in which CCPs are subject to market stress scenarios with a level of severity that goes increasingly beyond the worst historical market stress scenarios, and an increase in the number of defaulting Clearing Member groups (up to five).

Full depletion of both prefunded and non-prefunded resources occurs only under an extreme combination of assumptions, and then only for two CCP Clearing Services (LME Base and LCH SwapClear). This occurs under a combination of market stress scenarios and/or Clearing Member group default assumptions that go beyond historical precedents and regulatory requirements as well as, further to this, the inclusion of conservative estimates of concentration costs.

LCH SwapClear only experiences full depletion of prefunded and non-prefunded resources under a combination of these concentration costs, the simultaneous default of at least the three Clearing Member groups with the largest stressed losses over defaulting members’ resources, and a market stress scenario materially more severe than historically observed. LME Base only experiences full depletion of prefunded and non-prefunded resources under: (i) a combination of these concentration cost estimates, the simultaneous default of at least the four Clearing Member groups with the largest stressed losses over defaulting members’ resources, and a market stress scenario of similar severity to the worst historically observed market stress scenario for LME Base; or (ii) a combination of these concentration cost estimates, a Cover-2 default, and a market stress scenario materially more severe than historically observed.

Liquidity Stress Test

The Liquidity Stress Test shows that all three CCPs maintained a positive liquidity balance at the aggregate currency and individual currency level for key currencies (EUR, GBP and USD). This exercise also includes both sensitivity testing of the Liquidity Stress Test results and an analysis of the concentration of CCPs’ activity in three different types of service provider (payment banks, investment agents and custodians).

The Liquidity Sensitivity Testing examines the impact of disruption to CCPs’ ability to mobilise their liquid resources. The results vary across CCPs. For example, LCH is significantly impacted, and has a negative liquidity balance at the aggregate currency level, if unable to liquidate non-cash collateral in the market. Similarly, LMEC has a negative liquidity balance at the aggregate currency level if unable to access resources under management of the defaulting investment agents. However, in reality, CCPs have specific tools and measures available to manage these dependencies, including access to the Bank’s Discount Window Facility^{footnote [6]} and ability to revoke investment agents’ powers of attorney and mobilise their funds via alternative arrangements.

From a liquidity management perspective, the results show that the provision of key services that CCPs rely on for liquidity risk management are concentrated across a small number of payment banks, investment agents and custodians. Furthermore, these services are often performed by entities belonging to the same Clearing Member groups. While this concentration may be driven by Clearing Member preferences and market-related factors, these results demonstrate the importance of ensuring sufficient operational soundness of CCPs’ arrangements with service providers, ability to address service provider disruptions, and CCPs’ ongoing monitoring and testing of Clearing Members’ back up arrangements. The Bank will continue to keep these arrangements under review, including as part of future exercises.

Clearing Member and Client Analysis

The 2021–22 CCP SST exercise also includes an examination of the impact of the Baseline Market Stress Scenario and Clearing Member default scenarios from the perspective of the non-defaulting Clearing Member and client population at the UK CCPs. From a credit stress perspective, the exercise includes an examination of the impact on non-defaulting Clearing Members through depletion of their contributions to CCPs mutualised Default Funds. From a liquidity stress perspective, the exercise included an examination of the liquidity demands on Clearing Members through the Variation Margin calls in the Baseline Market Stress Scenario.

The results show that credit and liquidity demands are likely to be greatest for the largest financial groups. However, based on publicly available information and regulatory disclosures, these demands appear to be manageable in the context of those Clearing Members’ resources. Non-bank Clearing Members also face large Variation Margin calls, and the stress-test results show that the default of these (and other) non-bank Clearing Members can lead to mutualised losses at CCPs. It is therefore important that CCPs are fully assured of the ability of all of their Clearing Members, especially non-banks, to meet potential liquidity needs in a stress, including via due diligence and membership criteria.

These findings support the conclusions of the BCBS-CPMI-IOSCO Review of margining practices,^{footnote [7]} for which the next steps include further international work to enhance the transparency of stressed margin calls and enhance liquidity preparedness of the Clearing Member and client population.

Next steps

Following the conclusion of the 2021–22 CCP SST exercise, the Bank intends to publish a framework document for CCP supervisory stress testing during the course of 2023. This framework will draw on the feedback received on the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties as well as the experiences and lessons learned from the 2021–22 CCP SST exercise. The Bank will also launch its next supervisory stress test in due course.

3: Introduction

On 19 October 2021, the Bank announced the launch of the 2021–22 CCP SST. This exercise is the Bank’s first public CCP SST, and follows the Bank’s (non-public) pilot CCP SST exercise in 2019, the publication of the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties, and the Bank’s participation in the European Securities and Markets Authority’s (ESMA) EU-wide CCP Stress-Test exercises.

Objectives

As set out at the launch of the 2021–22 CCP SST, the exercise is exploratory in nature. It is not aimed at checking compliance with regulations, assessing CCPs’ internal stress tests, or testing CCPs against particular pass-fail thresholds. Rather, the exercise aims to identify potential vulnerabilities and gaps in CCP resilience, with the findings used to support and inform the Bank’s supervisory and regulatory activities.

The findings and lessons from running the 2021–22 CCP SST exercise will also be used to support the continued development of the Bank’s framework for CCP supervisory stress testing. This will be in conjunction with the feedback received on the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties.

A key objective of this exercise is to explore the individual and system-wide credit and liquidity resilience of the three UK CCPs (ICE Clear Europe Limited, LCH Limited and LME Clear Limited). In particular, the 2021–22 CCP SST examines the impact of a severe market shock and the default of selected Clearing Member groups (including in their capacity as service providers) on CCPs’ resources. These severe market shock scenarios include a Baseline Market Stress Scenario plus three additional market stress scenarios used for sensitivity analysis and reverse stress testing (see Section 4). The selected defaulting Clearing Member groups includes the default of the Cover-2 population at each CCP Clearing Service, but also other separate combinations of defaulting Clearing Members.

The exercise also includes an examination of the impact of the 2021–22 CCP SST Baseline Market Stress Scenario and default assumptions from the perspective of Clearing Members and clients. In particular, the exercise includes an analysis of the liquidity demands on Clearing Members and clients, as well as the potential allocation of losses over defaulters’ resources to non-defaulting Clearing Members through CCPs’ Default Waterfalls.

Participation

All of the three UK authorised CCPs participated in the 2021–22 CCP SST exercise (ICEU, LCH and LMEC).

All of the Clearing Services of the three UK authorised CCPs at the time of the launch of the 2021–22 CCP SST exercise were in scope. These Clearing Services cover a broad range of financial market products. The LME Precious Clearing Service has subsequently closed since the launch of the 2021–22 CCP SST, so results for LME Precious are not presented in this report. ^{footnote [8]}

Table A below details these Clearing Services and the key products cleared in each of these Clearing Services.

Analytical components

The 2021–22 CCP SST exercise consists of four core analytical components: the Credit Stress Test, the Credit Reverse Stress Test, the Liquidity Stress Test, and the Clearing Member and Client Analysis (Figure 1). The analysis for each is undertaken using a Baseline Market Stress Scenario, detailed in Section 4. Three additional market stress scenarios, also detailed in Section 4, are utilised for the purpose of the Credit Reverse Stress Test.

Section 5 covers the Credit Stress Test. The purpose of the Credit Stress Test component is to examine the combined impact of the Baseline Market Stress Scenario plus the simultaneous default of a given population of Clearing Member groups on CCPs Clearing Services’ financial resources, and assess their ability to absorb default losses within their respective Default Waterfalls.^{footnote [10]}

Section 6 covers the Credit Reverse Stress Test. The purpose of the Credit Reverse Stress Test is to identify what might fully deplete CCPs’ prefunded and non-prefunded resources CCPs by subjecting them to increasingly challenging combinations of assumptions. These combinations of assumptions on market stress severity, number of defaulting Clearing Member groups, and concentration costs are intentionally well beyond historical precedence and regulatory requirements, and in combination are extremely severe.

Section 7 covers the Liquidity Stress Test. The purpose of the Liquidity Stress Test is to examine the impact of the combined Baseline Market Stress Scenario plus the simultaneous default of the Cover-2 population (including in their capacity as service providers)^{footnote [11]} on CCPs’ liquid resources and their ability to meet their liquidity requirements. The Liquidity Stress Test component also includes an analysis of the provision of key services that CCPs rely on for liquidity risk management (Box B).

Section 8 covers the Clearing Member and Client Analysis. The Clearing Member and Client analysis is undertaken to examine the impacts of the Baseline Market Stress Scenario on Clearing Members and Clients of the UK CCPs. This analysis includes an examination of potential liquidity demands on Clearing Member and Client accounts, and Clearing Members’ exposures to potential losses through the mutualised Default Fund contributions across all CCP Clearing Services.

Section 9 summarises the conclusions of the 2021–22 CCP SST exercise, and details next steps regarding the development of the Bank’s framework for CCP supervisory stress testing.

Annexes contain additional results, charts and graphs referred to in the report.

Figure 1 summarises the analytical components and sub-components of the 2021–22 CCP SST exercise, detailed further in each components’ respective section.

Figure 1: Summary of the 2021–22 CCP SST analytical components

4: Market Stress Scenarios

The analysis in each of the Credit Stress Test, Liquidity Stress Test, and Clearing Member and Client analysis is based around a Baseline Market Stress Scenario. This Baseline Market Stress Scenario is also the starting point for the Credit Reverse Stress Test.

The Baseline Market Stress Scenario is a theoretical scenario produced by the Bank. It consists of shocks to the prices of a broad range of products cleared by the UK CCPs (see Table A above), rather than being concentrated in a small number of asset classes or products. In total, it includes two-day and five-day shocks to 119 individual market prices (or risk factors). The specific two-day and five-day shocks to each risk factor are detailed in Annex A.

The Baseline Market Stress Scenario represents a global ‘risk-off’ scenario, in which interest rates and government bond yields increase across most currencies and maturities, prices decline for the vast majority of commodity products, equity prices and equity indices decline, CDS spreads widen, and emerging market currencies depreciate.

In designing the Baseline Market Stress Scenario, the direction of – and relationship between – market shocks was grounded in historically observed shocks aligned to the overall ‘risk-off’ narrative. This was to ensure historically plausible correlations between different risk factors within product groups, as far as possible. As such, the design of the Baseline Market Stress Scenario utilises and incorporates the most severe historical market stress scenarios, but without replicating any individual historically observed scenarios or shocks.

The severity of the market shock scenarios in the Baseline Market Stress Scenario are then calibrated such that in combination, and with reference to the volumes of products cleared at each UK CCP Clearing Service, the Baseline Market Stress Scenario is broadly equivalent in severity to the worst historical stress experienced for each UK CCP Clearing Service.^{footnote [12]} As such, this is an extreme scenario, and at the limits of historical observations as at the launch of the 2021–22 CCP exercise in October 2021.

This scenario does not cover all possible sizes and combinations of market price shocks to which CCPs could be exposed. For example, the Baseline Market Stress Scenario is not concentrated in certain asset classes, and does not centre on large hypothetical shocks intended to go beyond historical limits in selected asset classes or products.

Since the launch of the 2021–22 CCP SST exercise, there have been large price shocks in some markets which in some cases have gone beyond those previously historically observed. Due to the timing of the 2021–22 CCP SST, these realised market stresses are not incorporated into the historical observations used to inform calibration of the Baseline Market Stress Scenario – though they will feature in future tests.

Further, while the Baseline Market Stress Scenario is calibrated to be broadly equivalent in overall severity to the worst historical stress for each UK CCP Clearing Service, the Bank judges that the worst two-day shocks over March 2022 were more severe overall for one UK CCP Clearing Service (LME Base) than the Baseline Market Stress Scenario.

For the purposes of sensitivity testing and reverse stress-testing analysis, the 2021–22 CCP SST also includes three additional market stress scenarios. Each of these are linear multipliers of the Baseline Market Stress Scenario. The first is a 0.8x multiplier of the Baseline Market Stress Scenario, in which each of the individual risk factor shocks specified in Annex A is multiplied by 0.8. Overall, this scenario is broadly equivalent in severity to 99.95% of the historical worst market stress for each individual Clearing Service.

The second and third additional market stress scenarios are 1.2x and 1.6x multipliers of the Baseline Market Stress Scenario, respectively. These scenarios are (overall) more severe than those historically observed, including the stress scenarios observed in March 2022 for UK CCPs clearing commodity products. These additional market stress scenarios also contain individual market shocks greater than historically observed for a variety of, but not all, individual risk factors.

Each of the Baseline Market Stress Scenario and additional market stress scenarios are applied to each CCP on a common reference date of end of day 17 September 2021. This reference date determines the market prices to which the market price shocks are applied, as well as CCP exposures and resources. The 17 September 2021 reference date was selected to capture settlement dates and expiries for particular contracts within our five-day stress period. CCP resources, CCP exposures and market prices on this date were generally representative of those over the previous 12 months. Clearing Member defaults also apply as at end of day 17 September. At this point, it is assumed that no payments are exchanged between CCPs and defaulting Clearing Members, no position changes are accepted, and hence no further payments or margin contributions are made to CCPs.

In order to ensure a complete and accurate reflection of the impact of the Baseline Market Stress Scenario on positions at UK CCPs, each CCP was required to extrapolate the 119 individual risk factor shocks prescribed by the Bank to all products and exposures within their respective clearing businesses. This extrapolation was undertaken in a manner consistent with the overall ‘risk-off’ narrative and intended severity of the Baseline Market Stress Scenario. The Bank reviewed each of the CCPs approach to extrapolation.

5: Credit Stress Test

Purpose and objectives

The Credit Stress Test component tests CCPs’ resilience against the combination of the Baseline Market Stress Scenario detailed in Section 4 plus the simultaneous default of a given Clearing Member population. The Credit Stress Test component comprises three sub-components:

• Standard Credit Stress Test: The Standard Credit Stress Test assesses the sufficiency of CCPs’ resources to absorb losses under combination of the market price shocks specified in the Baseline Market Stress Scenario, plus the simultaneous default of the Cover-2 population for each CCP Clearing Service. No concentration costs are included.
• Credit & Concentration Stress Test: The Credit & Concentration Stress Test assesses the sufficiency of CCPs’ resources to absorb losses under the combination of the market price shocks specified in the Baseline Market Stress Scenario, plus the simultaneous default of the Cover-2 population for each CCP Clearing Service, plus severe but plausible estimates of concentration costs. Concentration costs are the additional costs that CCPs face when they liquidate (through auction or hedging) concentrated positions of defaulters.
• Cover-X analysis: Cover-X analysis is used to assess the sufficiency of CCPs’ resources to absorb losses under the combination of market price shocks specified in the Baseline Market Stress Scenario, plus the simultaneous default of a customised selection of Clearing Member groups. The purpose of this analysis is to examine the sufficiency of resources sized in the context of the Cover-2 standard to the default of any other number, profile and combination of Clearing Members. In the 2021–22 CCP SST, Cover-X analysis specifically explores the default of two customised groups of Clearing Members. First, the default of non-bank Clearing Members, on the basis that these entities are typically subject to less regulatory scrutiny than larger Clearing Members. Second, the default of Clearing Members with lower credit ratings, on the basis that these entities have a greater implied probability of default. In both cases, the analysis includes severe but plausible estimates of concentration costs.

Each of these sub-components include sensitivity testing to examine the impact of alternative assumptions regarding CCPs’ ability to successfully port the client accounts of defaulting Clearing Members to non-defaulting Clearing Members.

Methodology

Overview

The Credit Stress Test aims to reflect, as closely as possible, the actual processes and mechanics of the default of a given population of Clearing Members in a market stress scenario, based on the applicable regulations and CCPs’ rulebooks. Where modelling assumptions are required, for example in the estimation of concentration costs, the Bank has developed and applied its own bespoke and conservative models.

The calculations in the Credit Stress Test, detailed below, have been performed by the Bank, but utilise data inputs requested from the CCPs. In particular, CCPs provided data on the impact of the relevant market stress scenarios on Clearing Member and Client positions at the account level (ie profits and losses resulting from the market shocks in those market stress scenarios). It was necessary to rely on CCPs’ established infrastructure to perform the full and exact revaluation of positions given the complexity of some of the products cleared by UK CCPs. However, the Bank has reconciled, sense-checked and validated the data submitted by CCPs, using other information sources available to the Bank where appropriate.

Calculation process

The Credit Stress Test is performed by assessing the impact on individual CCP Clearing Services’ financial resources under the Baseline Market Stress Scenario and simultaneous default of a given Clearing Member population.

The Credit Stress Test calculation is performed from the account level up. This allows various client porting assumptions, and the appropriate allocation of concentration costs. Where porting of client accounts is assumed (see ‘Porting assumptions’), client accounts are assumed to be moved across to a new Clearing Member with all their positions and account-level resources and are thus excluded from the rest of the calculation process.

For all non-ported client accounts, the surplus or deficit of resources at account level is determined based on the profit-and-loss (PNL) impact of the Baseline Market Stress Scenario, estimated concentration costs where applicable (see Box A for further information), and applicable account level prefunded resources.^{footnote [13]} Account segregation rules are then used to determine the overall impact at the Clearing Member level. In general, house accounts are always aggregated. Non-ported client accounts are aggregated only in the event of a deficit, as any surplus would be due to the client in question and the CCP would not be able to use it to service losses on other accounts.^{footnote [14]}

The final step is to calculate the applicable surplus/deficit for the defaulting Clearing Members groups based on the net surplus/deficit on consolidated accounts.^{footnote [15]} Under CCPs’ rules, defaulting Clearing Members are resolved separately, even if they are part of the same corporate group. Therefore, in calculating the final impact on mutualised resources, Clearing Members with a surplus are not included (as the surplus would be due to them and cannot be used to offset losses of other Clearing Members in the defaulting group). For Clearing Members with a deficit over their margin resources, quantification of the impact of such losses is undertaken as follows: first against their own Default Fund contributions, then against further resources available to the Clearing Services under their respective Default Waterfalls (in the following order of application):

• Skin in the Game (SITG): CCPs’ own capital set aside to absorb defaulters’ losses in the first instance.
• The mutualised Default Fund: Contributions of non-defaulting Clearing Members that can be used to absorb default event losses beyond SITG and would require replenishing by non-defaulting Clearing Members.
• Powers of Assessment: Additional non-prefunded resources that can be called by the CCP from non-defaulting Clearing Members in a given Clearing Service to cover default event losses, where a default event causes losses exceeding the mutualised Default Fund.^{footnote [16]}

This calculation is performed in full for every combination of defaulting Clearing Members within the scope of the 2021–22 CCP SST exercise.

Defaulter selection

The Credit Stress Test component includes a number of alternative approaches to selecting the defaulting Clearing Member population in the Baseline Market Stress Scenario.

The focus of the Standard Credit Stress Test and the Credit & Concentration Stress Test is the default of the Cover-2 population at each CCP Clearing Service. This is defined as the two Clearing Member groups whose default generates the greatest depletion of resources^{footnote [17]} at the CCP Clearing Service level, under the relevant market stress scenario. The focus on the Cover-2 population at the Clearing Service level reflects UK CCPs having multiple, segregated Default Funds for different asset classes,^{footnote [18]} between which the Cover-2 population will differ. All Clearing Members within the defaulting Clearing Member group are assumed to default at the relevant CCP Clearing Service. However, a Clearing Member defaulting at one CCP Clearing Service does not necessarily default at any other CCP Clearing Services unless also included in the Cover-2 population at those Clearing Services.

While not a focus of the analysis, results of the Standard Credit Stress Test and Credit & Concentration Stress test are also presented (in Annex B) under the default of the system-wide Cover-2 population. This is defined as the two Clearing Member groups whose default leads to the greatest absolute stressed losses over defaulting member resources across all CCP Clearing Services in aggregate.

The Cover-2 population under both approaches is determined dynamically. That is, the Cover-2 population is algorithmically determined for each CCP Clearing Service, or system-wide, for any combination of market stress scenario and all other input assumptions (such as the inclusion of concentration costs, or relevant porting assumption). By incorporating estimated concentration costs, the dynamic Cover-2 selection methodology calculates the depletion of CCP Clearing Service resources under every pair of Clearing Member groups to identify the pair whose default generates the greatest depletion when the estimated concentration costs related to the combined positions of the defaulters are included. Further detail on the concentration cost methodology is provided in Box A below.

In contrast to the Cover-2 methodology, the Cover-X analysis enables the selection of a customised population of defaulting Clearing Members. This could include any number, profile or combination of Clearing Members. In the 2021–22 CCP SST exercise, Cover-X analysis is used to explore the default of two specific groups of Clearing Members. First, the default of all non-bank Clearing Members, as identified by the Bank, at each CCP Clearing Service. Second, the default of all Clearing Members with lower credit ratings^{footnote [19]} at all CCP Clearing Services.

Porting assumptions

Each of the Credit Stress Test sub-components assess the impact on CCPs under different assumptions regarding CCPs’ ability to port the client accounts of defaulting Clearing Members to non-defaulting Clearing Members. Three different assumptions are explored in order to provide insights on the quantitative impact of porting on CCPs’ resilience:

1. No porting: No client accounts port from defaulting Clearing Members to non-defaulting Clearing Members. This is generally the most conservative porting assumption in the Credit Stress Test component.
2. Segregated client accounts port: Client accounts that are individually segregated (ISEG) and legally segregated operationally comingled (LSOC) are assumed to successfully port from defaulting Clearing Members to non-defaulting Clearing Members. Omnibus accounts do not port from defaulting Clearing Members to non-defaulting Clearing Members.
3. All client accounts port: All client accounts are assumed to successfully port from defaulting Clearing Members to non-defaulting Clearing Members, including both segregated and omnibus accounts.

Results

Standard Credit Stress Test

Chart 1 shows the results of the Standard Credit Stress Test, in which concentration costs are excluded. For each CCP Clearing Service, Chart 1 shows the total size of stressed losses over defaulting members’ resources under the CCP Clearing Service level Cover-2 population, and the proportion of SITG, mutualised Default Fund contributions, and Powers of Assessment depleted (as appropriate).

As shown in Chart 1, stressed losses over defaulting members’ resources vary across CCP Clearing Services, but there is only low to moderate (if any) depletion of mutualised Default Fund contributions under the Baseline Market Stress Scenario and default of the Cover-2 population at each CCP Clearing Service. Under the assumption that there is no porting of client accounts from defaulting Clearing Members to non-defaulting Clearing Members, aggregate stressed losses over defaulting members’ resources are approximately £1.9 billion, and are greatest, in absolute amounts, at LCH SwapClear reflecting the large size of this Clearing Service. Depletion of mutualised Default Fund resources is proportionally largest at LME Base at 35%. Three CCP Clearing Services observe no stressed losses over defaulting member resources (SLOMR).

The findings that there is only low to moderate depletion of mutualised Default Fund contributions remains true under all three porting assumptions. However, Chart 1 illustrates that the resilience of most CCP Clearing Services is sensitive to assumptions regarding CCPs’ ability or inability to successfully port client accounts at defaulting Clearing Members to non-defaulting Clearing Members. As would be expected, these benefits are observed most clearly where client clearing represents a greater share of clearing activity. In the case of LCH SwapClear, these benefits are observed when segregated client accounts are assumed to successfully port. For ICEU F&O and LME Base, these benefits predominantly arise when all client accounts (including gross and net omnibus accounts) are assumed to successfully port.

Chart 1: Standard Credit Stress Test results ^{(a) (b) (c) (d)}

Baseline Market Stress Scenario, Clearing Service Cover-2, all porting assumptions ^(e)

Footnotes

• (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
• (b) Percentage usage of dedicated CCP resources (SITG).
• (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).

Results of the Standard Credit Stress Test under the default of the system-wide Cover-2 population are presented in Annex B. The impact of the default of the system-wide Cover-2 population cannot by definition drive losses greater than those under the default of the CCP Clearing Service level Cover-2 (Chart 1).

Credit & Concentration Stress Test

Chart 2 shows the results of the Credit & Concentration Stress Test, in which the Bank’s estimates of concentration costs are additionally included.

Chart 2 illustrates that including estimated concentration costs can have a material impact on the level of Default Fund consumption at CCP Clearing Services. Under the most restrictive ‘no porting’ assumption, for example, allowing for concentration costs in the selection of the Cover-2 population can increase stressed losses over defaulting members’ resources by around 200% for some Clearing Services. With respect to the depletion of prefunded resources, the most material impact resulting from the inclusion of estimated concentration costs is at LME Base. In most part, this is due to the Cover-2 Clearing Member population having particularly large exposures in some products relative to the daily average volume traded for those products. For another Clearing Service (LCH ForexClear) inclusion of concentration cost results in roughly one-third of the mutualised Default Fund being depleted, in contrast to having no stressed losses over defaulting members’ resources in the Standard Credit Stress Test. For this Clearing Service these concentration costs arise on the relatively large positions of the defaulting Clearing Members in less liquid currency markets.

Chart 2 also illustrated that, while no CCP Clearing Service experiences a full depletion of prefunded financial resources when estimated concentration costs, results vary between CCP Clearing Services. For some Clearing Services, defaulting Clearing Members’ own resources are sufficient to meet losses, while other CCP Clearing Services observe only low to moderate depletion of prefunded resources. For LME Base losses result in close to full depletion of prefunded resources when estimated concentration costs are included under the ‘no porting’ assumption.

As in the Standard Credit Stress Test, the ability to successfully port client accounts at defaulting Clearing Members to non-defaulting Clearing has benefits at CCP Clearing Services where client clearing represents a greater share of clearing activity.

Chart 2: Credit & Concentration Stress Test results ^{(a) (b) (c) (d)}

Baseline Market Stress Scenario, Clearing Service Cover-2, all porting assumptions ^(e)

Footnotes

• (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
• (b) Percentage usage of dedicated CCP resources (SITG).
• (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).

Results of the Credit & Concentration Stress Test under the default of the system-wide Cover-2 population are presented in Annex B. As for the Standard Credit Stress Test, stressed losses are smaller than those under the default of the CCP Clearing Service level Cover-2. Notably, absolute stressed losses over defaulting members’ resources are concentrated in LCH SwapClear. This is unsurprising given LCH SwapClear is the largest UK CCP Clearing Service.

Cover-X analysis

Chart 3 illustrates the findings of the Credit Stress Test under the default of the non-bank Cover-X population, when including concentration costs. Under this approach, all non-bank Clearing Member entities are assumed to default at each CCP Clearing Service.

These results are more benign than under the default of the CCP Clearing Service level Cover-2 population in the Credit & Concentration Stress Test. However, three CCP Clearing Services still experience stressed losses over defaulting members’ resources, and two (ICEU F&O and LME Base) experience low levels of depletion of the mutualised Default Fund. Both of these CCP Clearing Services have a relatively higher number of non-bank Clearing Members compared to other CCP Clearing Services.

Chart 3: Credit & Concentration Stress Test results ^{(a) (b) (c) (d)}

Baseline Market Stress Scenario, non-bank Cover-all, all porting assumptions ^(e)

Footnotes

• (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
• (b) Percentage usage of dedicated CCP resources (SITG).
• (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).

Chart 4 shows the results of the Credit & Concentration Stress Test under the default of all Clearing Member groups with a credit rating of BBB and below, when including concentration costs. This approach is used to examine the impacts when a larger number of smaller Clearing Members, who each have a greater implied probability of default, each default simultaneously. As illustrated, the default of this Clearing Member population does not result in material utilisation of the mutualised Default Fund at any Clearing Service.

Chart 4: Credit & Concentration Stress Test ^{(a) (b) (c) (d)}

Baseline Market Stress Scenario, credit rating Cover-X, all porting assumptions ^(e)

Footnotes

• (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
• (b) Percentage usage of dedicated CCP resources (SITG).
• (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).

Further, a separate analysis suggests that when considering the default of only Clearing Member groups with a credit rating below BBB, only one CCP Clearing Service experiences any depletion of the mutualised Default Fund (3.5% at LME Base, under the ‘no porting’ assumption), while another (LCH SwapClear) experiences only 37% depletion of SITG. Using either a ‘BBB and below’ or ‘below BBB’ threshold, the depletion of each mutualised Default Fund is smaller than under the default of the Cover-2 population at each Clearing Service.

Conclusions and next steps

Overall, the results of the Credit Stress Test illustrate that none of the UK CCPs’ Clearing Services experience full depletion of prefunded financial resources under the combined Baseline Market Stress Scenario and default of the Cover-2 population at each CCP Clearing Service or at the system-wide level. This is true even when including estimated concentration costs, despite the significant impact that inclusion of concentration costs can have on stressed losses over defaulting member resources and depletion of the mutualised Default Fund across CCP Clearing Services. However, results vary across CCP Clearing Services. For some Clearing Services, defaulting Clearing Members’ own resources are sufficient to meet losses, while other CCP Clearing Services observe only low to moderate depletion of prefunded resources. For LME Base, losses result in close to full depletion of prefunded resources when concentration costs are included.

The Credit Stress Test results also show that the degree of resilience of most CCP Clearing Services is sensitive to assumptions regarding CCPs’ ability or inability to successfully port client accounts at defaulting Clearing Members to non-defaulting Clearing Members. While porting successfully during a default event may be challenging, the results show there are material benefits if porting can be executed effectively at Clearing Services where client clearing represents a greater share of clearing activity. For some Clearing Services these benefits are observed when segregated client accounts are assumed to successfully port, while for others they arise when all client accounts (including gross and net omnibus accounts) are assumed to successfully port. The recently published CPMI-IOSCO report, ‘Client clearing: access and portability’, set out a range of potentially effective porting practices, and called for development of further effective practices to facilitate porting. The Bank intends to continue analysis and exploration of porting in future CCP supervisory stress tests, as well as through other regulatory activities.

6: Credit Reverse Stress Test

Purpose and objectives

Reverse stress testing is deployed to identify what might fully deplete CCPs’ prefunded and non-prefunded resources CCPs by subjecting them to increasingly challenging combinations of assumptions. These combinations of assumptions on market stress severity, number of defaulting Clearing Member groups, and concentration costs are intentionally well beyond historical precedence and regulatory requirements, and in combination are extremely severe.

Methodology

The Credit Reverse Stress Test is undertaken using the same calculation methodology as the Credit Stress Test, with extensions to three dimensions. In particular, the Credit Reverse Stress Test explores the impact of increasing the conservativeness and severity of three key inputs in the Credit Stress Test to levels that intentionally go well beyond historical precedence and regulatory requirements, and in combination are extremely severe:

• Market stress scenario severity: In addition to the Baseline Market Stress Scenario, the Credit Reverse Stress Test includes an examination of results under the 0.8x, 1.2x and 1.6x multipliers of the Baseline Market Stress Scenario detailed in Section 4.
• Number of defaulting Clearing Member groups: The Credit Reverse Stress Test includes an examination of the Cover-N population for each CCP Clearing Service (and system-wide), for 1≤N≤5.
• Concentration cost calculation: The Credit Reverse Stress Test includes an analysis of the impact of increasing the severity of assumptions used to model concentration costs. In particular, assumptions are adjusted to increasingly limit the volume of defaulter positions that are assumed to be liquidated in each day of the stress-test window before giving rise to a concentration premium. In addition to the 25% of the daily average volume liquidation rate explained further in Box A, the Credit Reverse Stress Test examines the impact of more severe 15% and 10% daily liquidation rates.

The results of the Credit Reverse Stress Test are presented one-dimensionally, two-dimensionally, and three-dimensionally. In the one-dimensional Credit Reverse Stress Test, the conservativeness and severity of each of the assumptions above is increased individually, holding the other assumptions constant at the level considered in the Credit Stress Test.

The two-dimensional (Standard) Credit Reverse Stress Test subjects CCP Clearing Services to a combination of increasingly severe market stress scenarios, including scenarios beyond those historically observed, plus an increase in the number of defaulting Clearing Member groups. Concentration costs are not included.

The three-dimensional (Credit & Concentration) Reverse Stress Test provides an extension to the Credit & Concentration Stress Test in Section 5. In the Credit & Concentration Reverse Stress Test, CCP Clearing Services are subject to the same increasingly severe market stress scenarios and increases in the number of defaulting Clearing Member groups, plus increasingly severe estimates of concentration costs. Relative to the Standard Credit Reverse Stress Test, the Credit & Concentration Reverse Stress Test examines CCPs against assumptions that go even further beyond historical precedence and regulatory requirements.

Each of the sub-components of the Credit Reverse Stress Test are undertaken under the assumption that no porting of client accounts will occur, and on the basis of margin requirements (ie excluding excess margin). Each of these assumptions adds further to the conservativeness of the Credit Reverse Stress Test, as it means margin allocated to client accounts cannot be used to cover losses of other accounts or of the Clearing Members’ house accounts and reflects the possibility that Clearing Members may withdraw excess collateral from CCPs in the run-up to a default event.

As in the Credit Stress Test, the population of defaulting Clearing Member groups is selected dynamically for N≤2. For N>2, the defaulting population is selected independently using a ranking of the impact of individual Clearing Member group defaults.^{footnote [21]} Similarly to the Credit Stress Test, the focus is on results under a ‘CCP Clearing Service level Cover-N’ approach. However, results are also presented under a ‘System-wide Cover-N’ approach in Annex C.

Results for the two-dimensional and three-dimensional Credit Reverse Stress Test are presented using heat maps. These heat maps indicate, for each assumption combination, whether there is partial depletion of either SITG, the mutualised Default Fund, or Powers of Assessment, or whether there are losses beyond Powers of Assessment. Shading indicates the proportion of each of those layers of CCPs’ resources that are depleted, with losses beyond Powers of Assessment scaled relative to Powers of Assessment available. While not considered in this analysis, it is important to note that CCPs do have other tools that can be deployed where losses exceed Powers of Assessment (such as cash calls, variation margin gains haircutting and contract tear-ups).

Results

One-dimensional Credit Reverse Stress Test

Chart 5 presents stressed losses over defaulting members’ resources across all CCP clearing services as the conservativeness and severity of each of the three Credit Reverse Stress Test dimensions are scaled up and down individually, relative to the assumptions in the Credit & Concentration Stress Test (Section 5). This indicates that increasing the severity of the market stress scenarios, including to levels beyond those historically observed, has the greatest impact on stressed losses over defaulting members’ resources, compared to increasing the number of defaulting Clearing Member groups or increasing further the severity of the Bank’s concentration cost assumptions.

Chart 5: One-dimensional Credit Reverse Stress Test results ^(a)

Aggregate stressed losses over defaulting Clearing Member resources (£ billions)

Footnotes

• (a) Each line represents the impact of increasing the severity of one assumption while holding all other assumptions constant. Where the number of defaulting Clearing Member groups is held constant, the identity of the Clearing Member groups can change according to the dynamic Cover-2 methodology.

Standard Credit Reverse Stress Test

Chart 6 presents the results of the two-dimensional Standard Credit Reverse Stress Test, in which CCPs are subject to market stress scenarios with a level of severity that goes increasingly beyond the worst historical market stress scenarios, and an increase in the number of defaulting Clearing Member groups (up to five), but excluding estimated concentration costs.

No CCP Clearing Service experiences a full depletion of both prefunded and non-prefunded resources in the Standard Credit Reverse Stress Test. Further, only three CCP Clearing Services (LCH SwapClear, ICEU F&O and LME Base) experience full depletion of their mutualised Default Funds under any combination of market stress scenario and number of defaulting Clearing Member groups in the Standard Credit Reverse Stress Test. In the case of ICEU F&O, this only occurs under the 1.6x Baseline Market Stress Scenario when assuming more than two defaulting Clearing Member Groups.

LCH SwapClear only experiences full depletion of its mutualised Default Fund under the simultaneous default of five Clearing Member groups in the 1.2x Baseline Market Stress Scenario, or under a Cover-2 default in the 1.6x Baseline Market Stress Scenario. Both of these market stress scenarios are more severe than historically observed for this CCP Clearing Service.

LME Base experiences full depletion of its mutualised Default Fund under the simultaneous default of four Clearing Member groups in the 1.2x Baseline Market Stress Scenario, or under a Cover-2 default in the 1.6x Baseline Market Stress Scenario.

For all other CCP Clearing Services, prefunded resources are sufficient to cover stressed losses in all cases.

Chart 6: Standard Credit Reverse Stress Test results ^{(a) (b) (c)}

Clearing Service Cover-N, no porting

Footnotes

• (a) Percentage usage of dedicated CCP resources (SITG).
• (b) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (c) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters. PoA are assumed to be equal to the minimum of non-defaulting Clearing Member groups’ Default Fund contributions multiplied by three, or the non-defaulting Clearing Member groups’ Default Fund contributions multiplied by the number of individual defaulting Clearing Members.

Credit & Concentration Reverse Stress Test

In the Credit & Concentration Reverse Stress Test, CCP Clearing Services are subject to the same increasingly severe market scenarios and increases in the number of defaulting Clearing Member groups as in the Standard Credit Reverse Stress Test, plus the impacts of simultaneously increasing severe concentration assumptions. As such, the Credit & Concentration Reverse Stress Test examines CCPs against assumptions that are considerably more severe than those in the Standard Credit Stress Test.

As shown in Chart 7, there are limited combinations of severe assumptions under which any CCP experiences a full depletion of mutualised Default Fund contributions. Full depletion of both prefunded and non-prefunded resources occurs only under an extreme combination of assumptions, and then only for two CCP Clearing Services (LME Base and LCH SwapClear). This occurs under a combination of market stress scenarios and/or Clearing Member group default assumptions that go beyond historical precedents and regulatory requirements as well as, further to this, the inclusion of conservative estimates of concentration costs.

In the case of LCH SwapClear, full depletion of prefunded and non-prefunded resources only occurs under a combination of these concentration cost estimates, and the simultaneous default of at least the three Clearing Member groups with the largest stressed losses in a market stress scenario materially more severe than historically observed. Further, LCH SwapClear only experiences full depletion of the mutualised Default Fund in a Cover-2 default when (i) including concentration costs in market stress scenario more severe than historically observed; or (ii) under the most severe concentration cost assumptions in the Baseline Market Stress Scenario.

LME Base only experiences full depletion of prefunded and non-prefunded resources under either (i) a combination of these concentration cost estimates, and the simultaneous default of at least the four Clearing Member groups with the largest stressed losses over defaulting members’ resources in a market stress scenario that the Bank judges is of similar severity to the worst historically observed market stress scenario for LME Base;^{footnote [22]} or (ii) a combination of these concentration cost estimates and a Cover-2 default in a market stress scenario materially more severe than historically observed. LME Base only experiences full depletion of the mutualised Default Fund under a Cover-2 default in the Baseline Market Stress Scenario when including particularly severe concentration costs.

Two CCP Clearing Services (LCH ForexClear and ICEU F&O) only ever experience partial depletion of non-prefunded resources under any assumption combination in the Credit & Concentration Reverse Stress Test. Both Clearing Services only experiences full depletion of the mutualised Default Fund under a Cover-2 default when including concentration costs and under market stress scenarios more severe than historically observed.

The remaining three CCP Clearing Services (LCH RepoClear, LCH EquityClear and ICEU CDS) do not experience full depletion of prefunded resources under any combination in the Credit & Concentration Reverse Stress Test.

Chart 7: Credit & Concentration Reverse Stress Test results ^{(a) (b) (c) (d) (e)}

Clearing Service Cover-N, no porting

Footnotes

• (a) Percentage usage of dedicated CCP resources (SITG).
• (b) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
• (c) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters. PoA are assumed to be equal to the minimum of non-defaulting Clearing Member groups’ Default Fund contributions multiplied by three, or the non-defaulting Clearing Member groups’ Default Fund contributions multiplied by the number of individual defaulting Clearing Members.
• (d) Losses beyond PoA, presented with reference to the size of PoA. For example, 200% PoA equivalent where losses beyond PoA are of the same magnitude as PoA.
• (e) ‘Liq. %’ represents the assumed percentage of daily average volume traded for each product assumed can be liquidated daily without a price impact. N/A represents non-inclusion of concentration costs.

There are a number of factors that are likely to be driving differences between each CCP Clearing Service in the Credit Reverse Stress Test. The Credit Reverse Stress Test does not necessarily compare CCP Clearing Services on an equal basis. For example, using linear multipliers of the Baseline Market Stress Scenario to generate additional market stress scenarios may result in market stresses that fall further into, or beyond, the tail of the historical distribution of price shocks in some products cleared by UK CCPs. As such, some CCP Clearing Services might be subjected to a more severe market stress scenario than others for the 1.2x and 1.6x multipliers of the Baseline Market Stress Scenario. In the case of ICEU CDS, the market stress shocks utilised for the Credit Reverse Stress Test do not assume the default of entities’ CDS, which is an important determinant of financial resource sizing at this Clearing Service – this is something the Bank will consider for future stress tests.

Results for the three-dimensional Credit & Concentration Reverse Stress Test on a ‘system-wide Cover-N’ basis are presented in aggregate form in Annex C.

Conclusions and next steps

The Credit Reverse Stress Test subjects CCPs to increasingly challenging combinations of assumptions to identify what might fully deplete their prefunded and non-prefunded resources. These assumptions are intentionally well beyond historical precedence and regulatory requirements, and in combination are extremely severe.

No CCP Clearing Services experiences a full depletion of both prefunded and non-prefunded resources in the Standard Credit Reverse Stress Test in which CCPs are subject to market stress scenarios with a level of severity that goes increasingly beyond the worst historical market stress scenarios, and an increase in the number of defaulting Clearing Member groups (up to five). Only under market stress scenarios materially more severe than the worst historical market stress scenarios do two CCPs (LME Base and LCH SwapClear) experience full depletion of prefunded resources under a Cover-2 default.

Full depletion of both prefunded and non-prefunded resources occurs only under an extreme combination of assumptions, and then only for two CCP Clearing Services (LME Base and LCH SwapClear). This occurs under a combination of market stress scenarios and/or Clearing Member group default assumptions that go beyond historical precedents and regulatory requirements as well as, further to this, the inclusion of conservative estimates of concentration costs.

LCH SwapClear only experiences full depletion of prefunded and non-prefunded resources under a combination of these concentration costs, the simultaneous default of at least the three Clearing Member group with the largest stressed losses over defaulting members’ resources, and a market stress scenario materially more severe than historically observed. LME Base only experiences full depletion of prefunded and non-prefunded resources under (i) a combination of these concentration cost estimates, the simultaneous default of at least the four Clearing Member groups with the largest stressed losses over defaulting members’ resources, and a market stress scenario of similar severity to the worst historically observed market stress scenario for LME Base; or (ii) a combination of these concentration cost estimates, a Cover-2 default, and a market stress scenario materially more severe than historically observed.

7: Liquidity Stress Test

Purpose and objectives

The Liquidity Stress Test component is undertaken with the purpose of assessing CCPs’ liquidity resilience under the combined Baseline Market Stress Scenario plus the simultaneous default of the Cover-2 Clearing Member population (including in their capacity as service providers). It comprises two sub-components:

• Liquidity Stress Test: the Liquidity Stress Test examines CCPs’ liquidity resilience under the Baseline Market Stress Scenario and simultaneous default of the Cover-2 population at each CCP.
• Liquidity Sensitivity Testing: Liquidity Sensitivity Testing examines the impact of adjusting, individually and simultaneously, assumptions underpinning the Liquidity Stress Test on CCPs’ ability to service all relevant cash requirements. These sensitivity tests are used to examine CCPs’ reliance on different liquidity management tools.

The Liquidity Stress Test component also includes an analysis of the concentration of the provision of key services that CCPs rely on for liquidity risk management (Box B). Services in scope are payment bank services, investment agent services and custodial services.

Methodology

Overview

The methodology of the Liquidity Stress Test aims to simulate and test, with conservative assumptions, CCPs’ ability to service all relevant potential cash requirements resulting from the default of the Cover-2 population under the Baseline Market Stress Scenario. Where applicable, the methodology reflects the precise impact of the Baseline Market Stress Scenario on CCPs and Clearing Members (for example, on Variation Margin flows, trade settlement requirements, and revaluation of assets). Where modelling assumptions are required, the Bank has developed and applied its own in-house methodology and application of assumptions, prioritising conservativeness.

The calculations in the Liquidity Stress Test, detailed below, have been performed by the Bank, but utilise data inputs requested from the CCPs. In particular, and for purposes of precision, the Bank has relied on CCPs’ established infrastructure to infer the impact of the Baseline Market Stress Scenario on positions and corresponding Variation Margin flows. However, the Bank has reconciled, sense-checked and validated the data submitted by CCPs.

The calculations are performed over a period of five business days, comparing liquid resources that CCPs can mobilise to the liquidity requirements they are exposed to, in order to calculate the net surplus or deficit of liquidity on each day of the stress-test window on a cumulative basis. Results presented in the Liquidity Stress Test reflect the cumulative liquidity positions on the day in which the liquidity surplus was lowest (or liquidity deficit was greatest) for each CCP.

The analysis is undertaken at the aggregate currency level (GBP equivalent), covering resources and requirements in all currencies under the assumption of unlimited access to foreign exchange markets. The analysis is also undertaken at the individual currency level for key currencies (EUR, GBP, USD) assuming no access to foreign exchange markets.

Calculation process

Liquid resources available to the CCP and liquidity requirements CCPs would be exposed to are calculated for each of the five business days within the stress-test period, for every combination of two defaulting Clearing Member groups (see ‘Defaulter selection’ below for further details). The cumulative liquidity surplus or deficit is then calculated for each day, and results are reported using the ‘worst-day’ outcome (ie the day on which there is the greatest cumulative liquidity deficit or lowest cumulative liquidity surplus).

Liquid resources modelled represent the cash and assets assumed to be convertible into cash, available to the CCP under the relevant Liquidity Stress Test assumptions. Liquid resources are subject to the impact of the Baseline Market Stress Scenario through revaluation of assets and conversion to GBP (for results reported at the aggregate currency level), as well as through the default assumptions impacting CCPs’ ability to access these resources.

For the purposes of the Liquidity Stress Test, liquid resources comprise the following:

• Cash: representing cash available to the CCP from the following sources:
  • Cash held on account with central banks (assumed to be always available).
  • Cash held on account with commercial banks (subject to the commercial bank not defaulting).
  • Cash from maturing investments^{footnote [23]} ie reverse repos or maturing bonds (subject to applicable counterparties and securities custodians not defaulting).
  • Cash from maturing securities that are part of defaulting Clearing Members’ collateral (subject to applicable custodians not defaulting).
• Cash from utilisation of liquidity facilities: representing cash that CCPs could raise from committed facilities with non-defaulting commercial banks:^{footnote [24]}
  • Unsecured committed facilities (subject to the facility provider not defaulting).
  • Secured committed facilities (subject to the facility provider not defaulting and the CCP having access to unencumbered, eligible collateral).
• Cash from liquidation of assets: modelled to represent CCPs’ ability to liquidate in the market non-cash assets available to them (unencumbered). Assets in scope are limited to high-quality liquid securities, issued or explicitly guaranteed by central banks, governments or supranational agencies. CCPs are modelled to have access to eligible assets from the following sources:
  • Securities held by CCPs as investments (subject to applicable custodians not defaulting).
  • Securities posted by defaulters as collateral^{footnote [25]} (subject to applicable custodians not defaulting).

Liquidity requirements represent cash outflows that CCPs would have to service in the event of a default modelled under the Baseline Market Stress Scenario. Liquidity requirements are dependent on the direct impact of Clearing Member defaults and the Baseline Market Stress Scenario (for example, on defaulters’ Variation Margin and trade settlement obligations). Liquidity requirements are also dependent on conservatively modelled liquidity outflows aimed to simulate the market and Clearing Member reactions (for example, withdrawal of excess collateral, and reduction in Initial Margin as a result of non-defaulters hedging their exposures).

For the purposes of the Liquidity Stress Test, liquidity requirements comprise the following:

• Defaulters’ Variation Margin requirements (Variation Margin shortfall): cash outflows generated by CCPs’ need to post cash Variation Margin to non-defaulting Clearing Members for positions held by defaulted Clearing Members.
• Settlement obligations:
  • cash outflows generated by cash payments on servicing defaulters’ physically settled ‘buy’ trades;
  • net costs of sourcing assets to service defaulters’ physically settled ‘sell’ trades; and
  • cash settlements due to/from defaulters within the stress-test period.
• Operational requirements: cash outflows generated by the CCPs to fulfil operational requirements, including excess cash collateral repayment, substitution of cash collateral, potential reduction in Initial Margin, provision of liquidity to facilitate settlements/payments intraday, and other realistic operational requirements reported by CCPs.

Defaulter selection

The Liquidity Stress Test component focuses on the default of the Cover-2 Clearing Member population. This is defined as the two Clearing Member groups whose default generates the worst aggregated ‘worst-day’ cumulative balance at each CCP. All entities within the defaulting Clearing Member groups are assumed to default in all of their capacities vis-à-vis the CCP, even where those entities are not themselves Clearing Members. This means that when a Clearing Member defaults, all services provided by legal entities of the Clearing Member’s group are impacted.

As in the Credit Stress Test, the Cover-2 selection in the Liquidity Stress Test is dynamic. The impact is calculated for every combination of two defaulting Clearing Member groups separately for each CCP and currency, and the Cover-2 population is selected as the two Clearing Member groups whose default has the absolute worst impact on CCPs’ liquidity position.

The Liquidity Stress Test does not include examination of the default of any ‘Cover-X’ or ‘Cover-N’ populations akin to those examined in the Credit Stress Test and Credit Reverse Stress Test. That reflects the relative importance of the profile of defaulting Clearing Members (for example their role as service providers) over the number of defaulting Clearing Members.

Sensitivity testing

Sensitivity testing is used to explore the impact of adjustment to a number of key assumptions in the Liquidity Stress Test. These sensitivity tests are focused on examining the potential impact of restricting the actions that CCPs can take to manage their liquidity positions. In particular, four sensitivity tests are undertaken to examine the impact on CCPs under the following assumptions:

1. Payment bank sensitivity test: Clearing Members affected by payment bank disruptions are unable to make payment to CCPs on the day of default,^{footnote [26]} but CCPs still service all Variation Margin payments to all non-defaulters.
2. Investment agent sensitivity test: CCPs are unable to access any resources under management of investment agents.
3. Asset liquidation sensitivity test: CCPs are unable to liquidate any non-cash collateral.
4. Combined sensitivity test: Each of the payment bank, investment agent and asset liquidation sensitivity tests above are applied simultaneously.

These sensitivity tests are conducted across the aggregate currency measures, and for three key currencies (GBP, EUR, USD).

It is important to note that in examining CCPs’ reliance on different liquidity management tools, these sensitivity tests are deliberately conservative and do not take into account legal and operational protections available to CCPs. In reality, CCPs have tools and procedures at their disposal to avoid these assumptions transpiring. For example, if a payment bank were to fail, CCPs have the protection of Extended Member Liability. As such, non-defaulting Clearing Members still need to find alternative routes to pay CCPs on the same day and if they do not they can be put into default. CCPs also regularly test these arrangements. Further, even without calling those members into default, CCPs would not pay out any funds to members that did not perform towards CCPs. Investment agents operate on accounts owned by CCPs through Power of Attorney, and as such CCPs could revoke the Power of Attorney and access the funds via alternative arrangements (this is also tested by CCPs). The assumption that CCPs cannot liquidate high-quality bonds is a conservative one, given the overall liquidity and market size for the quality of assets CCPs hold.

While not a focus of the sensitivity testing, the Liquidity Sensitivity Testing also includes an examination of the impact of different porting assumptions as in Section 5.

Results

Liquidity Stress Test

Chart 8 and Chart 9 illustrate the results of the Liquidity Stress Test results, at the aggregate and individual currency level respectively. Each chart illustrates the cumulative ‘worst-day’ liquid resources, liquidity requirements and liquidity balance for each CCP.

Each CCP has sufficient liquidity, as shown by the positive worst-day liquidity balance at the aggregate currency level in Chart 8.^{footnote [27]} LCH has a worst-day liquidity balance of £36.8 billion, while ICEU and LMEC have worst-day liquidity balances of £25.6 billion and £6.2 billion respectively.

Chart 8: Liquidity Stress Test results ^(a)

Baseline Market Stress Scenario, aggregate currency level (GBP equivalent)

Footnotes

• (a) Liquid resources, liquidity requirements, and the liquidity balance are presented for the day in the stress-test window on which the liquidity balance was lowest for each CCP.

As at the aggregate currency level, each CCP has a positive worst-day liquidity balance in each key currency (EUR, GBP, USD), and thus a positive liquidity balance over the full five-day stress period (Chart 9). In particular, LCH has a positive worst-day liquidity balance of €9.0 billion, £10.2 billion and US$4.8 billion. ICEU has a positive worst-day liquidity balance of €8.9 billion, £7.9 billion and US$9.6 billion. LMEC has a positive worst-day liquidity balance of €0.2 billion, £0.03 billion and US$7.8 billion. Chart 9 shows these liquidity balances in GBP equivalent using stressed foreign exchange rates from the Baseline Market Stress Scenario, assuming no access to foreign exchange markets.

Chart 9: Liquidity Stress Test results ^(a)

Baseline Market Stress Scenario, individual currency level (GBP equivalent)

Footnotes

• (a) Liquid resources, liquidity requirements, and the liquidity balance are presented for the day in the stress-test window on which the liquidity balance was lowest for each individual currency for each CCP.

Liquidity Sensitivity Testing

The results of the each of the individual sensitivity tests and the combined sensitivity test are summarised in Chart 10.

Under the payment bank sensitivity test – in which Clearing Members affected by payment bank disruptions are unable to make payment to CCPs on the day of default, but CCPs still service all Variation Margin payments to all non-defaulters – each CCPs’ liquidity balance is reduced but remains positive. LCH’s worst-day liquidity balance drops to £32.4 billion, while ICEU’s liquidity balance drops to £18.3 billion. There is no impact on LMEC under the payment bank sensitivity test at the aggregate currency level. All CCPs also maintain a robust liquidity position at an individual currency level for all currencies reported even when assuming no access to foreign exchange markets (see Annex D).^{footnote [28]}

The results of the investment agent sensitivity test show that inability of CCPs to access resources under management of the defaulting investment agents could have a large impact on ICEU and LMEC. Under this conservative assumption, LMEC experience a small negative liquidity balance (-£0.3 billion) at the aggregate currency level. While ICEU observe an £11.7 billion decline in their liquidity balance at the aggregate currency level compared to the Liquidity Stress Test, it remains positive. Results are similar to this for both LMEC and ICEU at the individual currency level (Annex D). There is no impact on LCH in the investment agent sensitivity test, as LCH has an in-house investment function and does not use investment agents.

However, as noted above, the assumptions applied in the investment agent sensitivity test are particularly conservative in nature and do not account for tools and procedures CCPs have at their disposal. In particular, investment agents operate on accounts owned by CCPs through Power of Attorney, and as such CCPs could revoke the Power of Attorney and access the funds via alternative arrangements.

The results of the asset liquidation sensitivity test show that if unable to liquidate non-cash collateral, CCPs would be affected to differing degrees. The results show LCH is particularly dependent on the repo market for raising liquidity in the Baseline Market Stress Scenario, and would have a liquidity shortfall (-£1.7 billion) at the aggregate currency level if unable to liquidate non-cash collateral. This is also true at an individual currency level for GBP and USD if LCH could not also not access the foreign exchange market (Annex D). Both ICEU and LMEC maintain a positive liquidity balance at the aggregate currency level (£13.5 billion and £5.4 billion respectively).

Again, the assumption applied in the asset liquidation sensitivity test (ie inability to liquidate any non-cash collateral) is a conservative one, given the overall liquidity and market size for the quality of assets CCPs hold. UK CCPs also have access to the Bank’s Discount Window Facility,^{footnote [29]} so would be able to cover a liquidity shortfall of the size identified in this sensitivity test, even under such conservative assumptions.

Finally, the combined sensitivity test applies each of the payment bank sensitivity test, investment agent sensitivity test, and asset liquidation sensitivity test simultaneously. In combining each of these sensitivity tests together, CCPs are subjected to a particularly conservative set of assumptions. Only under the combined sensitivity test do all three CCPs experience a negative liquidity balance at the aggregate currency level. However, even under this particularly conservative combination of assumptions, and additionally assuming no access to foreign exchange markets, LCH still maintains a positive liquidity balance in EUR, and ICEU still maintains a positive liquidity balance in EUR and GBP (Annex D).

Chart 10: Liquidity Sensitivity Testing results ^(a)

Baseline Market Stress Scenario, aggregate currency level (GBP equivalent)

Footnotes

• (a) The liquidity balance is presented for the day in the stress-test window on which the liquidity balance was lowest for each individual CCP, and under each individual sensitivity test.

Adjusting porting assumptions – and separately the severity of the market stress scenario – in the Liquidity Stress Test has a negligible impact on results. As such, results of the Liquidity Stress Test under the additional porting or market stress scenarios are not presented in this report.

Conclusions and next steps

Overall, the results of the Liquidity Stress Test illustrate that the UK CCPs are resilient to the Baseline Market Stress Scenario and simultaneous default of the Cover-2 population. No UK CCP experiences a negative liquidity balance at any point in the stress-test window in the Liquidity Stress Test, either at an aggregate currency level or in the key individual currencies.

Results of the sensitivity tests highlight differences between CCPs, with LCH significantly impacted if unable to liquidate non-cash collateral in the market and LMEC experiencing a negative liquidity balance if unable to access resources under management of the defaulting investment agents. While these sensitivity tests apply conservative assumptions, they highlight the importance of the specific tools and measures available to CCPs to manage the risks explored in the sensitivity test. Results of the sensitivity tests also illustrate which assumptions which restrict the actions CCPs can to take to manage their liquidity positions are more impactful for CCPs’ liquidity resilience than increasing the severity of the market stress scenario applied in the Liquidity Stress Test.

The Bank will continue to monitor CCP liquidity resilience following the 2021–22 CCP SST exercise, including as part of future CCP supervisory stress-test exercises.

Box B: Service provider concentration analysis

As illustrated in the Liquidity Stress Test component (Section 7), service providers can play a crucial role in CCPs’ liquidity risk management. Their failure or non-performance can have potentially significant impacts on CCPs. This includes compromising CCPs’ ability to service relevant cash requirements, transfer collateral or fulfil securities obligations.

Using data from the Baseline Market Stress Scenario, the analysis in this box examines the concentration of CCPs’ activity across three types of service providers:

• Payment banks:^{footnote [30]} payment banks process cash collateral flows between CCPs and their members, and may also assist in processing cash settlements on members’ transactions. To facilitate this, CCPs hold accounts with multiple payment banks (also referred to as Assured Payment System or APS) for each relevant currency and require their Clearing Members to have accounts in one of the qualifying payments banks for each currency the given members use. Disruptions at a payment bank can expose CCPs to operational risk, and possibly credit and intraday liquidity risk where the CCP experiences delays in fulfilling payment and settlement obligations.
• Custodians:^{footnote [31]} custodians safeguard prefunded financial resources that have been provided to the CCP on behalf of the CCP’s members and their clients. These resources include Initial Margin and Default Fund contributions made by members. Disruptions at a custodian can expose CCPs to operational, credit and liquidity risks, as CCPs may experience a delay in accessing collateral.
• Investment agents:^{footnote [32]} investment agents manage CCPs’ total investment portfolio, including investments of cash and/or other collateral as well as the CCPs’ own cash resources. The non-performance of an investment agent exposes CCPs to credit, operational and liquidity risks, as the CCP may experience a delay in accessing its investments under management of the investment agent.

For payment banks, Chart A illustrates the concentration of Variation Margin payments processed by different payment banks across each CCP individually, and across all CCPs in aggregate. As illustrated, the provision of payment bank services is highly concentrated in two payment banks at each CCP, and across all CCPs in aggregate. However, the concentration of payment bank services is not unexpected. Clearing Members are likely to use the same payment bank (or group) for all of their Variation Margin payments across all currencies and CCPs. Indeed, CCPs provide a list of eligible payment services, but it is Clearing Members who designate a specific provider from that list based either on the convenience of using the same bank across services, or on members’ ongoing relationship with that given entity. Clearing Members offering payment services themselves will also tend to process their own payments in house rather than relying on a different entity. Further, UK CCPs have services and cash flows in many currencies and so require payment banks with multicurrency services; this limits the number of appropriate service providers, and means CCPs cannot just settle across the central bank.

As part of the 2021–22 CCP SST exercise, CCPs also reported their back-up payment bank arrangements. These allow Clearing Members to process their payment flows through an alternative payment service provider in case the primary payment bank fails to deliver for any reason. These back-up entities include central banks which in the event of an operational failure at the primary payment service can accept direct cash transfer to their concentration bank account. In this case, the Variation Margin flows do not need to go through a payment bank.

Chart A: Payment bank concentration ^(a)

Cumulative market share of Variation Margin payments processed, GBP equivalent (per cent)

Footnotes

• (a) The number of payment banks increases according to order ranking of market share. For any given number of payment banks, the identity of payments banks is not necessarily the same for each CCP.

For custodians, Chart B illustrates the concentration of CCPs’ securities held by custodians. This shows that the provision of custodial services is significantly concentrated in just a few entities for each individual CCP and across all CCPs in aggregate. This concentration is related to dominant Central Securities Deposits^{footnote [33]} (CSDs) who account for half of the number of custodians available to CCPs. In addition to the size of assets under the custody of CSDs, the size of assets under the custody of custodian banks is also significant. Most custodian banks are also payment banks (or an entity within their group is), which highlights the risk of potential further disruption following the default of a custodian.

These findings highlight the importance of CCPs ensuring the operational soundness of their arrangements with custodians, as well as ensuring they have the operational tools to address their non-performance.

Chart B: Custodial services concentration ^(a)

Cumulative market share of CCP securities held by custodians, GBP equivalent (per cent)

Footnotes

• (a) The number of custodians increases according to order ranking of market share. For any given number of custodians, the identity of custodians is not necessarily the same for each CCP.

For investment agents, Chart C illustrates the concentration of CCPs’ investments under management by investment agents. This illustrates that the provision of investment agent services is concentrated in two major entities at each of ICEU and LMEC. LCH is not shown in Chart C, as LCH invests collateral directly rather than through investment agents.

These high levels of concentration are expected for investment agent services, given that the viability of the service provided relies on large volumes of investments under management. Notably, these large investment agents are also major Clearing Members and custodians in the CCP network. This illustrates that the potential distress of an investment agent could also originate from operations outside of the core investment services offered, and/or create financial distress for one of more of CCPs’ investment counterparties. For this reason, protection against bankruptcy or insolvency of the custodian is established by segregating the assets held on clients’ behalf from those of the Clearing Member.

Chart C: Investment agent services concentration ^(a)

Cumulative market share of CCP investments under management by investment agents, GBP equivalent (per cent)

Footnotes

• (a) The number of investment agents increases according to order ranking of market share. For any given number of investment agents, the identity of investment agents is not necessarily the same for each CCP.

8: Clearing Member and Client Analysis

Purpose and objectives

One of the objectives of the 2021–22 CCP SST exercise is to examine system-wide effects, in particular the knock-on impacts of stress-test scenarios on Clearing Members and Clients. In this context, the Clearing Member and Client Analysis is undertaken to examine the impacts of the Baseline Market Stress Scenario on the non-defaulting Clearing Member and Client population at UK CCPs.

This analysis is also undertaken with a view to progressing the International Monetary Fund’s (IMF’s) recommendations in the United Kingdom: Financial Sector Assessment Program (FSAP).^{footnote [34]} The IMF FSAP included recommendations to: (i) co-ordinate supervisory stress testing of CCPs with stress tests on CCP Clearing Members and clients so that the results of each test can inform the other tests and; (ii) report aggregate measures of CCP stress liquidity demands on Clearing Members and clients as part of the output of supervisory stress tests.

The Clearing Member and Client Analysis is split into two sub-components. First, an examination of potential liquidity demands on Clearing Members and client accounts, with a focus on the resulting Variation Margin calls (‘liquidity analysis’). Second, an examination of individual non-defaulting Clearing Members’ exposures to potential losses through requirements to replenish mutualised Default Fund contributions across all CCP Clearing Services (‘credit analysis’).

Methodology

Liquidity analysis

While it is difficult to quantify the precise liquidity positions of members in the Baseline Market Stress Scenario, as this will depend on the exact timings of liquidity draws across accounts and currencies, gross Variation Margin outflows and inflows and net Variation Margin flows are computed in order to estimate the liquidity impact on Clearing Members. Gross Variation Margin outflows and inflows on each Clearing Member are measured by the total Variation Margin paid from and to Clearing Members as a result of the Baseline Market Stress Scenario, before netting across accounts and currencies. Net Variation Margin flows are measured as the final Variation Margin increase of decrease experienced by each Clearing Member as a result of the Baseline Market Stress Scenario, once all accounts have been settled.

For the purpose of this analysis all Variation Margin flows are assumed to occur within one margin cycle. This is a conservative assumption, given that the Baseline Market Stress Scenario has a five-day time horizon. All values are presented in GBP equivalent, converted using FX rates after the Baseline Market Stress Scenario has occurred.

Using the gross and net Variation Margin flows defined, the impact on Clearing Members is analysed across all CCPs at which they are Clearing Members. This impact is also broken down where appropriate into the impact on house accounts and client accounts. In view of the wide range of members at UK CCPs, the analysis is also divided into bank and non-bank^{footnote [35]} Clearing Members and, to the extent possible, the ability of these Clearing Members to meet liquidity demands.

Credit analysis

The credit sub-component is an examination of the second-round impacts on non-defaulting Clearing Member population arising from the default of other Clearing Members. That is, the impact on non-defaulting Clearing Members through utilisation of their mutualised Default Fund contributions and through CCPs’ Powers of Assessment.

This examination uses estimates of mutualised resource depletion from the Credit Stress Test component (Section 5), with the impact on mutualised resources distributed across non-defaulting Clearing Members in proportion to their Default Fund contributions at each CCP Clearing Service (close to what would happen in practice when the Default Fund is replenished). These impacts are then aggregated across Clearing Member groups and across CCPs, to identify the entities most impacted by mutualised losses, and examine their ability to absorb such a loss.

The analysis is undertaken assuming the default of a common set of Clearing Members across all CCP Clearing Services. In particular, it is assumed that the system-wide Cover-2 population defaults under the Baseline Market Stress Scenario when including concentration costs (for which results from a CCP perspective are presented in Chart 3 in Section 5). As per Chart 3, it is assumed that no porting takes place, and results are presented on the basis of required, rather than total, margin. As in Section 5, the system-wide Cover-2 population is defined as the two Clearing Member groups whose default in the Baseline Market Stress Scenario leads to the largest aggregate losses over defaulting members’ resources across all CCP Clearing Services in aggregate.

This analysis is also extended by considering the impact of the default of one or more non-bank Clearing Members, rather than the system-wide Cover-2 population. Again this analysis is undertaken under the Baseline Market Stress Scenario, when including concentration costs, on a required margin basis and assuming no porting.

Results

Liquidity analysis

As shown in Chart 11, the largest Variation Margin flows are in the largest Clearing Services and in the key currencies in the Baseline Market Stress Scenario. For some Clearing Services, such as LCH SwapClear, ICEU F&O, ICEU CDS and LME Base, most of the Variation Margin flows occur in client accounts. While it is the Clearing Members that are responsible for meeting Variation Margin calls this analysis highlights the potential funding requirements that are faced by clients under the Baseline Market Stress Scenario.

Chart 11: Gross Variation Margin payments by currency and account type ^{(a) (b)}

Relative share of gross Variation Margin payments for each CCP Clearing Service (per cent)

Footnotes

• (a) The relative share of gross Variation Margin payments in both client and house accounts, and for individual currencies, is calculated at the Clearing Service level.
• (b) C = client accounts, H = house accounts.

From a Clearing Member perspective, Chart 12 shows that gross outflows are often much larger than net inflows and outflows for the largest Clearing Members. For example, one Clearing Member experiences gross outflows on house and client accounts of over £13 billion, but has a small net Variation Margin inflow of £0.1 billion. This highlights the importance of Clearing Member liquidity preparedness, given Clearing Members’ requirements to service all payments to CCPs before receiving payments due from them.

Further, client accounts account for the majority of gross outflows, while often having net inflows. This also highlights the importance of Clearing Member liquidity preparedness in light of their important intermediary role, since Clearing Members are required to meet intra-day margin calls on behalf of clients, but their clients will often not be required to pay until the following day, or even later.

Chart 12: Variation Margin inflows and outflows for the top 10 Clearing Member Groups ^{(a) (b)}

Gross Variation Margin in/outflows on client and house accounts, and net in/outflows across all accounts (£ billions)

Footnotes

• (a) The top 10 Clearing Member (CM) groups are those with the greatest Variation Margin flows.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not correspond to a given Clearing Member group more than once in Section 8.

However, the most impacted groups in terms of gross Variation Margin outflows are all large financial institutions, and in particular global systemically important banks (G-SIBS),^{footnote [36]} who maintain large reserves to meet unexpected liquidity flows. Chart 13 shows that for all of the top 10 Clearing Member groups, gross Variation Margin outflows represent only a small fraction (less than 5%) of these entities High-Quality Liquid Assets (HQLA).^{footnote [37]} This suggests that, on their own, these liquidity demands should not represent a severe liquidity stress for these firms.

Chart 13: Gross Variation Margin outflows for top 10 Clearing Member groups ^{(a) (b)}

Gross Variation Margin outflows as a share of group HQLA (per cent) ^(c)

Footnotes

• (a) The top 10 Clearing Member (CM) groups are those with the greatest Variation Margin flows.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not corresponds to a given Clearing Member group more than once in Section 8.
• (c) HQLA is a standard metric of bank liquidity capacity.

The Clearing Member and Client Analysis also includes an analysis of the cash Variation Margin outflows on the 10 largest non-bank CCP members. As shown in Chart 14, net flows are closer to gross flows for non-bank members, as they often have more directional exposures than banks. While these Variation Margin flows for non-banks are smaller than those for the largest bank Clearing Members, Chart 14 shows that they can still be significant. For one Clearing Member, gross and net flows are around £900 million and £800 million respectively.

It is therefore important that CCPs are confident in their members’ ability to meet potential liquidity needs in a stress, including via due diligence and membership criteria. This also points to the value of enhancing the liquidity preparedness of the Clearing Member and client population, and the transparency of stressed margin calls.

Chart 14 also shows that a large proportion of non-bank Clearing Members’ Variation Margin flows are on client accounts, which would create liquidity exposures for these Clearing Members in the event that clients are unable to pay Variation Margin, even if only temporarily. The Bank will consider how to undertake further work to examine timing differences and intraday aspects as part of future stress-test exercises.

Chart 14: Gross Variation Margin outflows for the top 10 non-bank Clearing Member Groups ^{(a) (b)}

Gross Variation Margin in/outflows on client and house accounts, and net in/outflows across all accounts (£ millions)

Footnotes

• (a) The top 10 non-bank Clearing Member (CM) groups are non-banks with the greatest Variation Margin flows.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not corresponds to a given Clearing Member group more than once in Section 8.

Credit analysis

Chart 15 shows that the default of the system-wide Cover-2 population under the Baseline Market Stress Scenario (see Annex B) has a limited impact on non-defaulting Clearing Members, even when including concentration costs. Mutualised losses at CCP Clearing Services are distributed across the financial system, according to the contributions of individual Clearing Member groups to each CCPs’ Default Waterfall. Aggregating across the affected CCP Clearing Services, losses range from £88 million to £270 million for each of the 10 most affected Clearing Member groups.

Chart 15: Mutualised losses at the top 10 Clearing Member groups from the default of the system-wide Cover-2 population ^{(a) (b)}

Utilisation of the top 10 Clearing Member groups’ Default Fund contributions (£ millions)

Footnotes

• (a) The top 10 Clearing Member (CM) groups are those with the greatest mutualised losses.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not corresponds to a given Clearing Member group more than once in Section 8.

All 10 of the most affected groups are banks, and hence have substantial capital resources to absorb losses. When comparing the mutualised losses of these Clearing Member groups to their capital resources, Chart 16 shows that they represent less than 0.4% of any of these groups’ Tier 1 capital. This suggests that, on their own, they do not present a significant risk to each of these firms’ solvency.

Chart 16: Mutualised losses at the top 10 Clearing Member groups from the default of the system-wide Cover-2 population ^{(a) (b)}

Utilisation of the top 10 Clearing Member groups’ Default Fund contributions, share of group Tier 1 capital (per cent) ^(c)

Footnotes

• (a) The top 10 Clearing Member (CM) groups are those with the greatest mutualised losses.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not corresponds to a given Clearing Member group more than once in Section 8.
• (c) Tier 1 capital refers to banks’ equity capital and disclosed reserves, and is used to measure capital adequacy.

While the default of one or more major banks is an important risk for CCPs to manage, it may be seen as a fairly remote scenario from the perspective of Clearing Members’ own risk management. The Clearing Member and Client Analysis therefore also examines the potential mutualised losses arising from the default of non-bank CCP members.

Chart 17 shows that under the Baseline Market Stress Scenario the default of all non-bank Clearing Members at each CCP Clearing Service can lead to mutualised losses for the largest Clearing Members. These mutualised losses are concentrated in ICEU F&O and LME Base as demonstrated in Chart 3 (Section 5). While the size of these losses is smaller than that arising from the default of the Cover-2 population, the default of non-bank defaults may be viewed as a more likely scenario, and one which can still expose the surviving Clearing Members to mutualised losses. Even under the default of a smaller number of non-bank Clearing Members, CCPs and Clearing Members experience some depletion of mutualised Default Fund contributions.

Chart 17: Mutualised losses at the top 10 Clearing Member groups from the default of all non-bank Clearing Members ^{(a) (b)}

Utilisation of the top 10 Clearing Member groups’ Default Fund contributions (£ millions)

Footnotes

• (a) The top 10 Clearing Member (CM) groups are those with the greatest mutualised losses.
• (b) Clearing Member group identities are scrambled across Section 8. A given Clearing Member group numbering does not corresponds to a given Clearing Member group more than once in Section 8.

Conclusions and next steps

The Clearing Member and Client Analysis shows that, overall, impacts on the largest financial groups from a liquidity stress and credit stress perspective are likely to be manageable in isolation, when put in the context of those Clearing Member groups’ liquidity and capital resources. However, non-bank Clearing Members face large Variation Margin calls in the Baseline Market Stress Scenario. It is therefore important that CCPs are confident in their members’ ability to meet potential liquidity needs in a stress, including via due diligence and membership criteria.

The default of non-bank Clearing Members can lead to mutualised losses at CCPs in the Baseline Market Stress Scenario. While the size of these losses is smaller than those arising under the default of the Cover-2 population, the default of this population could be more likely than the default of the largest Clearing Member groups. This highlights the importance of CCPs and Clearing Members considering the possibility of different defaulter combinations beyond Cover-2 in their risk management.

The Clearing Member and Client Analysis also highlights the important intermediary role that Clearing Members play between clients and CCPs, and therefore their liquidity preparedness, given they are initially required to meet intraday margin calls on behalf of clients.

The findings of the Clearing Member and Client Analysis support further work planned at the international level, through the BCBS-CPMI-IOSCO Review of margining practices. The proposed next steps of that international work include further international work to enhance the transparency of stressed margin calls, enhance liquidity preparedness of the Clearing Member and client population, and examine Clearing Member practices in passing on margin calls to clients. The Bank also proposes to consider how to undertake further work to examine these Clearing Member and client margin call timing differences and intraday aspects as part of future stress-test exercises.

9: Overall conclusions and next steps

Conclusions

Overall, the results of the Credit Stress Test component shows that all UK CCP Clearing Services are resilient to the default of their Cover-2 population under the Baseline Market Stress Scenario. This market stress scenario is broadly equivalent in overall severity to the worst historical stress for each UK CCP Clearing Service as at the 2021–22 CCP SST reference date. No CCP Clearing Service experiences full depletion of the Default Fund, even after allowing for concentration costs. Though, results vary across CCP Clearing Services. The results of the Credit Stress Test also show that there can be material benefits to CCP resilience when they are able to successfully port the client accounts at defaulting Clearing Members to non-defaulting Clearing Members. The recently published CPMI-IOSCO report, ‘Client clearing: access and portability’, set out a range of potentially effective porting practices, and called for development of further effective practices to facilitate porting. The Bank intends to continue analysis and exploration of porting in future CCP supervisory stress tests, as well as through other regulatory activities.

In the Credit Reverse Stress Test, CCPs are subjected to increasingly challenging combination of assumptions to identify what might fully deplete their prefunded and non-prefunded resources. These assumptions are intentionally well beyond historical experience and regulatory requirements, and in combination are extremely severe. No CCP Clearing Service experiences a full depletion of both prefunded and non-prefunded resources in the Standard Credit Reverse Stress Test in which CCPs are subject to market stress scenarios with a level of severity that goes increasingly beyond the worst historical market stress scenarios, and an increase in the number of defaulting Clearing Member groups (up to five). Full depletion of both prefunded and non-prefunded resources occurs only under an extreme combination of assumptions, and then only for two CCP Clearing Services (LME Base and LCH SwapClear). This occurs under a combination of market stress scenarios and/or Clearing group default assumptions that go beyond historical precedence and regulatory requirements as well as, further to this, the inclusion of conservative estimates of concentration costs.

The results of the Liquidity Stress Test component show that all three UK CCPs are also resilient to the default and non-performance of their Cover-2 population under the Baseline Market Stress Scenario. No CCP experiences a negative liquidity balance at any point in the stress-test window under the Liquidity Stress Test assumptions, either at an aggregate currency level or in each of EUR, GBP and USD. Liquidity Sensitivity Testing, used to restrict the actions CCPs are able to take, highlights differences between CCPs. The findings show that LCH is relatively more dependent on its ability to liquidate non-cash collateral, while LMEC is relatively more dependent on its ability to access resources under management of defaulting investment agents. From a liquidity management perspective, the results show that the provision of key services that CCPs rely on for liquidity risk management are concentrated across a small number of payment banks, investment agents and custodians. These services are often provided to the UK CCPs by entities belonging to the same Clearing Member groups. While this concentration may be driven by Clearing Member preferences and market-related factors, the Bank will continue to keep concentration levels and CCPs’ arrangements to manage the associated risks under review in future stress-test exercises.

From the perspective of Clearing Members, the results show that liquidity demands and impacts through mutualised Default Fund depletion are greatest for the largest financial groups, but appear to be manageable in the context of those Clearing Members’ resources. However, non-bank Clearing Members can also face large Variation Margin calls and the stress-test results show that the default of non-bank Clearing Members can also lead to mutualised losses at CCPs. It is therefore important that CCPs are confident in their members’ ability to meet potential liquidity needs in a stress, including via due diligence and membership criteria. These findings support the conclusions of the BCBS-CPMI-IOSCO Review of margining practices, for which the next steps include further international work to enhance the transparency of stressed margin calls and liquidity preparedness of the Clearing Member and client population.

Next steps

This exercise is the first time that the Bank has conducted a public CCP supervisory stress test. It is likely to take a number of iterations before the Bank can deliver exercises that meet the medium-term aspirations preliminarily set out in the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties and which will be set out in final form in the Bank’s framework for CCP Supervisory Stress Testing. The Bank will continue to work closely with CCPs towards this goal.

Undertaking the 2021–22 CCP SST exercise has highlighted a number of potential areas for further development of the Bank’s CCP supervisory stress-testing framework. These include, but are not necessarily limited to, the following:

• Market stress scenario design: There are likely benefits to developing a standardised approach to the provision (by the Bank) and extrapolation (by CCPs) of the risk factors in CCP SST market stress scenarios. A standardised approach could be utilised for each annual CCP exercise and reduce resource requirements for both the Bank and CCPs. There may also be benefits to exploring additional methods to designing and calibrating market stress scenarios for future annual exercises. This could include incorporating both broad market-wide stress scenarios and more targeted hypothetical market stress scenarios in future stress-test exercises.
• Credit Stress Test component: There are likely benefits to extending the range of Cover-X analysis undertaken in the Credit Stress Test component, to explore a wider range of potential defaulting Clearing Member combinations. There may also be benefits in continued assessment and fine-tuning of the concentration costs calculation methodology.
• Credit Reverse Stress Test component: While technically challenging, there are likely benefits to further developing the approach to the dynamic identification of the Cover-N population when considering concentration costs for N>2, including for system-wide Cover-N approaches. There may be value in considering alternative approaches to scaling up the conservativeness and severity of key analytical assumptions (for example, which assumptions, to what levels of severity, and how). There may also be benefits to developing approaches to undertake market stress severity reverse stress testing on single products or groups of products.
• Clearing Member and Client Analysis: To extend the analysis of Clearing Member and client impacts further, future stress-test exercises could also include an examination of the liquidity impacts arising on Clearing Members and clients from Initial Margin calls. There is also potential to extend the analysis of the impact on clients, and explore potential linkages with regulatory stress tests of banks and requirements on the Clearing Member and client population.
• Porting: The 2021–22 CCP SST exercise demonstrated that there can be material benefits under the successful porting of client accounts. There may be benefits in continuing to explore and expanding analysis of porting in future CCP supervisory stress tests, as well as through other regulatory activities.

These areas will be considered for further development alongside the feedback provided in response to the Bank’s Discussion Paper on Supervisory Stress Testing of Central Counterparties. The Bank then intends to publish a framework document for CCP supervisory stress testing in the course of 2023. This publication will set out the Bank’s overarching framework for CCP supervisory stress testing, and guide the design of each of the Bank’s annual CCP SST exercises. The Bank will also launch its next supervisory stress test in due course.

Annexes

• Annex A: Baseline Market Stress Scenario (two-day and five-day price moves)

  Asset class (risk factor)	Market move
  	two day	five day
  FX (percentage change)
  USDKRW	4.80%	7.70%
  USDTWD	0.90%	1.40%
  AUDUSD	-6.20%	-9.70%
  USDJPY	4.20%	6.70%
  USDINR	0.80%	1.30%
  EURUSD	-2.10%	-3.30%
  USDCHF	3.30%	5.30%
  GBPUSD	-5.60%	-8.80%
  USDBRL	6.00%	9.50%
  Equities (percentage change)
  NIKKEI225	-9.50%	-15.00%
  EUROSTOXX50	-14.90%	-23.50%
  FTSE100 INDEX	-13.50%	-21.30%
  S&P 500	-10.90%	-17.20%
  MSCI WORLD INDEX	-10.80%	-17.00%
  Credit (absolute spread change, in basis points)
  ITRAXX EUR IG	9	14
  ITRAXX XOVER	156	246
  CDX IG	38	60
  CDX HY	155	245
  ITRAXX SNR FIN	37	59
  Commodities (percentage change)
  BRENT OIL	-20.40%	-32.20%
  BRENT OIL FUTURE 1M	-20.40%	-32.20%
  BRENT OIL FUTURE 3M	-20.40%	-32.20%
  BRENT OIL FUTURE 6M	-17.40%	-27.50%
  BRENT OIL FUTURE 12M	-16.80%	-26.50%
  WTI	-28.40%	-44.90%
  WTI FUTURE 1M	-28.40%	-44.90%
  WTI FUTURE 3M	-28.40%	-44.90%
  WTI FUTURE 6M	-25.10%	-39.70%
  WTI FUTURE 12M	-24.30%	-38.30%
  GASOIL	-19.10%	-30.20%
  GASOIL FUTURE 1M	-19.10%	-30.20%
  GASOIL FUTURE 3M	-19.00%	-30.00%
  GASOIL FUTURE 6M	-18.80%	-29.60%
  GASOIL FUTURE 12M	-18.30%	-28.90%
  EUA	-22.80%	-36.00%
  EUA FUTURE 1M	-22.80%	-36.00%
  EUA FUTURE 3M	-22.80%	-36.00%
  EUA FUTURE 6M	-21.60%	-34.20%
  EUA FUTURE 12M	-21.60%	-34.20%
  US NATURAL GAS	-3.10%	-4.90%
  US NATURAL GAS FUTURE 3M	-3.10%	-4.90%
  DUTCH NATURAL GAS	-12.40%	-19.60%
  DUTCH NATURAL GAS FUTURE 3M	-12.30%	-19.40%
  ALUMINIUM FUTURE 3M	-6.90%	-10.90%
  COPPER FUTURE 3M	-14.90%	-23.50%
  ZINC FUTURE 3M	-9.60%	-15.20%
  NICKEL FUTURE 3M	-14.90%	-23.50%
  GOLD	3.00%	4.70%
  COCOA	-5.00%	-8.70%
  FX Vols (absolute percentage change in volatility)
  USDKRW 1M	8.10%	12.90%
  USDTWD 1M	1.30%	2.10%
  AUDUSD 1M	8.20%	13.00%
  USDJPY 1M	2.70%	4.30%
  USDINR 1M	1.70%	2.60%
  EURUSD 1M	2.80%	4.40%
  USDCHF 1M	1.70%	2.80%
  GBPUSD 1M	9.20%	14.60%
  Commodities Vol (absolute percentage change in volatility)
  BRENT 3M	27.00%	42.80%
  WTI 3M	37.40%	59.10%
  NATURAL GAS 3M	11.50%	18.30%
  Rates (absolute rate change, in basis points)
  AUD SW 1Y	32	51
  AUD SW 2Y	47	74
  AUD SW 5Y	40	63
  AUD SW 10Y	38	60
  AUD SW 30Y	35	55
  JPY GOV 1Y	-1	-1
  JPY GOV 5Y	6	9
  JPY GOV 10Y	8	13
  JPY GOV 30Y	5	8
  JPY SW 1Y	13	20
  JPY SW 2Y	13	20
  JPY SW 5Y	12	19
  JPY SW 10Y	14	23
  JPY SW 30Y	12	19
  EUR SW 1Y	20	31
  EUR SW 2Y	28	45
  EUR SW 5Y	24	38
  EUR SW 10Y	17	26
  EUR SW 30Y	13	21
  FR GOV 1Y	3	5
  FR GOV 5Y	22	35
  FR GOV 10Y	32	51
  FR GOV 30Y	32	50
  GER GOV 1Y	3	5
  GER GOV 5Y	24	38
  GER GOV 10Y	28	45
  GER GOV 30Y	31	49
  CHF SW 1Y	33	53
  CHF SW 2Y	37	59
  CHF SW 5Y	25	39
  CHF SW 10Y	17	28
  CHF SW 30Y	13	21
  GBP GOV 1Y	-1	-1
  GBP GOV 5Y	27	43
  GBP GOV 10Y	40	63
  GBP GOV 30Y	48	76
  GBP SW 1Y	21	34
  GBP SW 2Y	31	49
  GBP SW 5Y	11	18
  GBP SW 10Y	18	29
  GBP SW 30Y	13	20
  USD GOV 1Y	-5	-8
  USD GOV 5Y	27	43
  USD GOV 10Y	40	64
  USD GOV 30Y	24	38
  USD SW 1Y	29	46
  USD SW 2Y	45	71
  USD SW 5Y	45	71
  USD SW 10Y	43	69
  USD SW 30Y	34	54
  CAD SW 1Y	32	50
  CAD SW 2Y	50	79
  CAD SW 5Y	48	76
  CAD SW 10Y	38	60
  CAD SW 30Y	27	43
  Equities Vol (absolute percentage change in volatility)
  Nikkei225 Implied Volatility Index	12.20%	19.30%
  EUROSTOXX50 Implied Volatility Index	25.20%	39.90%
  FTSE100 Implied Volatility Index	23.80%	37.60%
  VIX Index	18.20%	28.80%

• Annex B: Credit Stress Test results (system-wide Cover-2)

  Chart B1: Standard Credit Stress Test results ^{(a) (b) (c) (d)}

  Baseline Market Stress Scenario, System-wide Cover-2, all porting assumptions ^(e)

  

  Footnotes

  • (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
  • (b) Percentage usage of dedicated CCP resources (SITG).
  • (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
  • (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
  • (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).
  • LCH SwapClear, ICEU F&O and LME Base experience low depletion of the mutualised Default Fund.

  Chart B2: Credit & Concentration Stress Test results ^{(a) (b) (c) (d)}

  Baseline Market Stress Scenario, System-wide Cover-2, all porting assumptions ^(e)

  

  Footnotes

  • (a) Stressed Losses over defaulting Members’ Resources (SLOMR) is the absolute amount (£ millions) by which losses exceed defaulters’ resources (Initial Margin and Default Fund contributions).
  • (b) Percentage usage of dedicated CCP resources (SITG).
  • (c) Percentage usage of mutualised Default Fund (DF), consisting of non-defaulters’ Default Fund contributions.
  • (d) Percentage usage of Power of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
  • (e) A = ‘No porting’ (no client accounts at defaulting Clearing Members port to non-defaulting Clearing Members), B = ‘Segregated accounts port’ (only the segregated client accounts port), and C = ‘All accounts port’ (all client accounts port, including omnibus accounts).

• Annex C: Credit Reverse Stress Test results (system-wide Cover‑N)

  Chart C1: Credit Reverse Stress Test results ^{(a) (b) (c) (d)}

  System-wide Cover-N, no porting

  

  Footnotes

  • (a) Percentage usage of all CCP Clearing Services’ mutualised Default Fund (DF) contributions, consisting of non-defaulters’ Default Fund contributions.
  • (b) Percentage usage of all CCP Clearing Services’ Powers of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
  • (c) Losses beyond PoA across all CCP Clearing Services’ presented with reference to all CCP Clearing Services’ Powers of Assessment. For example, 200% PoA equivalent where losses beyond PoA are of the same magnitude as PoA.
  • (d) ‘Liq. %’ represents the assumed percentage of daily average volume traded for each product assumed can be liquidated daily without a price impact. N/A represents non-inclusion of concentration costs.

• Annex D: Currency level Liquidity Sensitivity Testing results (EUR, GBP, USD)

  Chart D1: Liquidity Sensitivity Testing results (EUR) ^{(a) (b)}

  Baseline Market Stress Scenario, individual currency level

  

  Footnotes

  • (a) The liquidity balance is presented for the day in the stress-test window on which the EUR liquidity balance was lowest for each individual CCP, and under each individual sensitivity test.
  • (b) EUR level results are not included for LMEC due to an immaterial EUR liquidity balance.

  Chart D2: Liquidity Sensitivity Testing results (GBP) ^{(a) (b)}

  Baseline Market Stress Scenario, individual currency level

  

  Footnotes

  • (a) The liquidity balance is presented for the day in the stress-test window on which the GBP liquidity balance was lowest for each individual CCP, and under each individual sensitivity test.
  • (b) GBP level results are not included for LMEC due to an immaterial GBP liquidity balance.

  Chart D3: Liquidity Sensitivity Testing results (USD) ^(a)

  Baseline Market Stress Scenario, individual currency level

  

  Footnotes

  • (a) The liquidity balance is presented for the day in the stress-test window on which the USD liquidity balance was lowest for each individual CCP, and under each individual sensitivity test.