2023 CCP Supervisory Stress Test: results report

1: Foreword

The publication of the Bank’s second public UK Central Counterparty (CCP) Supervisory Stress Test marks another important step forward in the Bank’s supervision and regulation of CCPs.

CCPs sit at the centre of the UK and global financial system. Their resilience is important to financial stability in the UK and overseas. And supervisory stress tests like these have a key role to play in assessing that resilience, providing transparency, and promoting confidence.

This is the second exercise of this nature that the Bank has undertaken. It incorporates several new innovations relative to the previous exercise, including an assessment of CCP resilience against more idiosyncratic shocks. From a wider perspective, it also includes an assessment of the potential Initial Margin and Variation Margin calls that CCPs’ members might face in a stress – something that the Bank’s system-wide exploratory scenario (SWES) exercise will examine in further detail.

The results confirm the continued resilience of UK CCPs to market stress scenarios that are of equal and greater severity than the worst-ever historical market stresses. CCPs’ results have improved across each of the components of the stress test relative to our previous exercise. Notably, CCPs are able to more comfortably absorb default losses and maintain higher liquidity balances through the exercise. And they are also able to survive more extreme combinations of assumptions, which intentionally go beyond historical precedents and regulatory requirements.

This reflects CCPs’ financial resources as well as levels of collateralisation that have increased after the periods of market volatility in energy, metals, and UK rates markets in 2022. While this dynamic of higher market volatility leading to higher margins is expected and an integral part of CCPs’ risk models and risk management, the Bank has also deployed in-house models to understand how the results might look as Initial Margin levels have reduced following a period of lower volatility, supporting our assessment of UK CCPs’ resilience.

This ability to adjust assumptions and increase severity across multiple dimensions independently and in combination enhances the Bank’s understanding of a wide range of risks to UK CCPs. In conjunction with the Bank’s past and future CCP stress-test exercises, it further supports the Bank’s supervision and regulation of UK CCPs, contributing to financial stability at home and abroad.

Sarah Breeden, Deputy Governor Financial Stability

2: Executive summary

Purpose and design

UK central counterparties (CCPs) lie at the heart of the global financial system and are supervised by the Bank of England (the Bank) because of their importance to the smooth functioning of financial markets and the wider economy. As part of this supervision, the Bank conducts regular stress testing of UK CCPs. This report sets out the results of the Bank’s second public supervisory stress test of UK CCPs (the 2023 CCP SST).

The 2023 CCP SST explores the credit and liquidity resilience of the three UK CCPs (ICE Clear Europe Limited (ICEU), LCH Limited (LCH), and LME Clear Limited (LMEC)), and their interconnectedness with the rest of the financial system. It is not a pass-fail exercise. Nor is it aimed at checking compliance with regulations or assessing the quality of CCPs’ internal stress testing. Rather, it aims to identify any potential vulnerabilities and gaps in CCPs’ financial resilience, with the findings used to support and inform the Bank’s supervisory and regulatory activities.

The 2023 CCP SST has four analytical components: the Credit Stress Test, the Credit Reverse Stress Test, the Liquidity Stress Test, and the Clearing Member and Client Analysis. It includes several extensions relative to the Bank’s previous CCP SST exercise. Each component is based on a hypothetical Baseline Market Stress Scenario, which represents a global economic downturn combined with a negative supply shock in commodities markets. The scenario consists of shocks to a wide range of products cleared by UK CCPs. The Bank has calibrated the scenario to a level of severity broadly equivalent to the worst historical stress experienced by each CCP, while ensuring historically plausible correlations between different risk factors. Overall, the Baseline Market Stress Scenario is also more severe than the corresponding scenario in the Bank’s previous CCP SST exercise, as the calibration methodology incorporates the large shocks that occurred in energy, metals, and UK rates markets in 2022.

Results and findings

Overall, the exercise demonstrates that UK CCPs are resilient to the Baseline Market Stress Scenario and default of the Cover-2 population,^{footnote [1]} from both a credit and liquidity perspective.

In the Credit Stress Test, all UK CCP Clearing Services have sufficient prefunded resources^{footnote [2]} to comfortably absorb default losses following a Cover-2 default, even when accounting for the cost of liquidating concentrated positions. Only two CCP Clearing Services (ICEU F&O and LME Base) experience any depletion of mutualised Default Fund contributions. Defaulters’ own resources and CCPs’ own capital^{footnote [3]} are sufficient to cover default losses at the other CCP Clearing Services.

Further, each UK CCP Clearing Service sees less depletion of mutualised Default Fund contributions than in the Bank’s previous CCP SST exercise. This is despite the more severe Baseline Market Stress Scenario. This confirms the UK clearing system responded as it was expected to following the periods of market volatility in 2022. That volatility fed through CCPs’ risk models and risk management into increases in Initial Margin requirements and Default Fund sizing ahead of the 2023 CCP SST launch date. This means a greater share of total stressed losses are covered by defaulters’ own resources, reducing the depletion of mutualised Default Fund contributions at each CCP Clearing Service.^{footnote [4]}

Initial Margin requirements have fallen at some CCP Clearing Services since the 2023 CCP SST reference date, consistent with normalising market conditions and a reduction in volatility. Nonetheless, internal analysis suggests CCPs would continue to be resilient to the Baseline Market Stress Scenario and simultaneous Cover-2 default, despite increased depletion of prefunded resources.

In the Credit Reverse Stress Test – which tests CCPs against increasingly challenging assumptions that go beyond historical precedent and regulatory requirements – all three CCPs perform better relative to the Bank’s previous CCP SST exercise. This is despite the Credit Reverse Stress Test also applying more severe market stress scenarios than in the Bank’s previous CCP SST exercise. Under the most severe combination of assumptions examined – a more severe market stress scenario, a higher number of defaulting Clearing Members, and reduced ability to liquidate concentrated positions – only one CCP Clearing Service (LME Base) experiences full depletion of both prefunded and non-prefunded resources.^{footnote [5]}

When extending this analysis to test CCPs against idiosyncratic shocks deliberately outside historical experience, the results provide evidence of CCPs’ ability to withstand targeted shocks more extreme than the historical worst for individual product groups. This new and exploratory analysis assesses the size of shocks required in different product groups (such as Brent Crude Oil products, or GBP interest rate swaps) to deplete CCP Clearing Services’ Default Funds under a Cover-2 default. This analysis is not as accurate as the Credit Stress Test and Credit Reverse Stress Test, which are based on full scenario revaluations undertaken by CCPs.^{footnote [6]} The Bank intends to follow up with CCPs to discuss the analysis in more detail and subsequently develop and improve this modelling capacity further to support ongoing supervision.

The Liquidity Stress Test shows that all three CCPs can meet liquidity requirements under the combination of the Baseline Market Stress Scenario and the simultaneous default and failure of the Cover-2 population. Each CCP maintains a positive liquidity balance in aggregate, and in key individual currencies (EUR, GBP and USD) when additionally assuming no access to foreign exchange markets. When subjected to more extreme assumptions regarding their ability to mobilise liquid resources – to examine CCPs’ reliance on different liquidity management tools – results are generally improved relative to the Bank’s previous CCP SST exercise.

The provision of key services that CCPs rely on for liquidity risk management remain concentrated. This concentration reflects Clearing Member preferences and market-related factors, but continues to illustrate the importance of CCPs ensuring their arrangements with service providers are appropriately robust.

The largest liquidity demands from CCPs’ margin calls generally fall on the Clearing Members who are the largest financial groups and are better able to manage them. Consistent with the Bank’s previous CCP SST exercise, non-bank Clearing Members face liquidity demands which, while smaller, can still be significant.

Overall, the liquidity demands from Variation Margin calls are more material than those from increased in Initial Margin requirements, but relative increases in Initial Margin requirements can still be material for some Clearing Members. The Bank is working with other international regulators to improve the transparency of Initial Margining practices, and intends to explore liquidity demands from margin calls further as part of the Bank’s system-wide exploratory scenario exercise.

The Bank will use the findings from the 2023 CCP SST to support and inform its ongoing supervision and regulation of UK CCPs.

3: Introduction

UK central counterparties (CCPs) lie at the heart of the financial system, playing a crucial role in the functioning of financial markets in the UK and globally. The Bank of England (the Bank) supervises UK CCPs because of their importance to the smooth functioning of the financial system and wider economy.

As part of the Bank’s ongoing supervision of UK CCPs, the Bank conducts regular supervisory stress testing. The Bank concluded its first public CCP supervisory stress test (the 2021–22 CCP SST) in October 2022. In March 2023, the Bank launched its second public supervisory stress test of UK CCPs (the 2023 CCP SST). This report sets out the results of the 2023 CCP SST exercise.

Like the previous exercise, the 2023 CCP SST explores the individual and cross-CCP credit and liquidity resilience of the UK CCPs (listed in Table A), and their interconnectedness with the rest of the financial system. It aims to identify any potential vulnerabilities and gaps in CCPs’ financial resilience, with the findings used to support and inform the Bank’s supervisory and regulatory activities. It is not a pass-fail exercise, nor is it aimed at checking compliance with regulations or assessing the quality of CCPs’ internal stress testing.

Like the 2021–22 CCP SST, the 2023 CCP SST comprises four overarching analytical components (summarised in Figure 1):

• The Credit Stress Test. An assessment of CCPs’ resilience to the default of their Clearing Members in a severe market stress scenario, focusing on the sufficiency of financial resources under CCPs’ default waterfalls.^{footnote [7]} Further details of the Credit Stress Test component are provided in Section 5.
• The Credit Reverse Stress Test. An assessment of CCPs’ resilience to increasingly severe assumptions to identify what combination of assumptions might fully deplete CCPs’ prefunded^{footnote [8]} and non-prefunded^{footnote [9]} resources. These assumptions – regarding market stress severity, number of defaulting Clearing Members, and the cost of liquidating defaulters’ positions – deliberately go beyond historical precedents and regulatory requirements.^{footnote [10]} In combination they are extremely severe. Further details of the Credit Reverse Stress Test component are provided in Section 6.
• The Liquidity Stress Test. An assessment of CCPs’ ability to service all relevant liquidity requirements under a severe market stress and the simultaneous default and failure of selected Clearing Members and service providers. This component also includes an analysis of the provision of key services that CCPs rely on for liquidity risk management. Further details of the Liquidity Stress Test component are provided in Section 7.
• Clearing Member and Client Analysis. An assessment of the potential liquidity demands from CCPs’ margin calls on UK CCPs’ Clearing Members and their clients in a severe market stress. Further details of the Clearing Member and Client Analysis component are provided in Section 8.

Figure 1: Summary of the 2023 CCP SST analytical components ^(a)

Footnotes

• (a) Sub-components and elements with an asterisk are new or extended relative to the Bank’s previous CCP SST exercise.

4: Market stress scenarios

Each of the components in the 2023 CCP SST applies a hypothetical market stress scenario developed by the Bank (the Baseline Market Stress Scenario). The Baseline Market Stress Scenario is based on a global economic downturn and negative supply shock in commodities markets. Interest rates and government bond yields increase across most currencies and maturities, while equity prices and equity indices decline, and emerging market currencies depreciate against the US dollar. In commodities markets, the prices of most gas, oil, power and metals commodities increase, while the prices of agricultural commodities and carbon emissions allowances decline.

Overall, the Baseline Market Stress Scenario is calibrated to achieve a target level of severity for each CCP Clearing Service, rather than being concentrated in certain markets, while maintaining historically plausible correlations between different market prices and rates (‘risk factors’). In particular, the risk factor shocks were calibrated such that in combination they were broadly equivalent in severity to the worst historical stress experienced for each UK CCP Clearing Service, given the volume and mix of products cleared. To ensure historically plausible correlations between risk factors, the direction of and relationship between shocks were grounded in historically observed shocks consistent with the overall scenario narrative. As such, the design of the Baseline Market Stress Scenario incorporates the most severe historical stresses, but without replicating any specific event.

Overall, the 2023 CCP SST Baseline Market Stress Scenario is more severe than the corresponding scenario in the Bank’s previous CCP SST exercise. This reflects the calibration methodology incorporating the large ahistorical shocks that occurred in energy, metals, and UK rates markets in 2022. Each of these shocks occurred after the reference date for the Bank’s previous CCP SST exercise,^{footnote [11]} but before the 10 February 2023 reference date for the 2023 CCP SST.

In total, the Bank specified the two-day and five-day shocks for over 850 market prices and rates (‘risk factors’) in the Baseline Market Stress Scenario. This full set of risk factor shocks was published at the launch of the 2023 CCP SST (2023 CCP SST Market Stress Scenarios). To ensure a complete and accurate reflection of the Baseline Market Stress Scenario on UK CCPs, each CCP was required to extrapolate these 850+ individual risk factor shocks to all products and exposures within their respective clearing businesses. This extrapolation was undertaken in a manner consistent with the overall scenario narrative and intended severity of the Baseline Market Stress Scenario. The Bank reviewed each CCP’s approach to extrapolation.

The 2023 CCP SST also includes three additional ‘multiplier’ scenarios. These are constructed by applying linear multipliers (of -1.0x, 1.5x and 2.0x respectively) to each of the individual risk factor shocks in the Baseline Market Stress Scenario. The inclusion of a -1.0x multiplier scenario – in which the direction of shocks in the Baseline Market Stress Scenario are reversed^{footnote [12]} – is new relative to the Bank’s previous CCP SST exercise and supports exploratory analysis in the Credit Stress Test. The 1.5x and 2.0x multiplier scenarios – which are more severe than the multiplier scenarios applied in the Bank’s previous CCP SST exercise^{footnote [13]} – are used for the Credit Reverse Stress Test component. In addition, the Credit Reverse Stress Test component includes exploratory analysis of CCP resilience to more targeted product-specific stress scenarios (refer to Box B for more information).

Each of the Baseline Market Stress Scenario and additional multiplier scenarios are applied on the 10 February 2023 reference date for the 2023 CCP SST. This reference date was selected to be generally representative of the period since the conclusion of the Bank’s previous CCP SST exercise.^{footnote [14]} It determines the market prices and rates to which the risk factor shocks are applied, as well as the size of CCP exposures and resources in the 2023 CCP SST. Clearing Member defaults are assumed to occur after the end of day on the reference date, but before markets open the following working day. At this point, the Bank assumes that: (i) no payments are exchanged between CCPs and defaulting Clearing Members; (ii) no position changes are accepted; and (iii) no further payments or margin contributions are made to CCPs.

5: Credit Stress Test

Purpose and objectives

The Credit Stress Test assesses whether CCPs’ financial resources are sufficient to absorb default losses in a severe market stress scenario. These losses include those resulting from changes in the value of defaulters’ positions due to the market stress scenario, and the additional costs that CCPs may face when they liquidate – through hedging or auction – a large or concentrated positions of defaulters (referred to as ‘concentration costs’).

The Credit Stress Test is organised into four sub-components:

• Standard Credit Stress Test: assesses the sufficiency of CCPs’ resources to absorb losses under the market price shocks specified in the Baseline Market Stress Scenario and simultaneous default of the Cover-2 population. The Cover-2 population consists of the two Clearing Member groups whose default generates the largest exposure at each CCP Clearing Service under the applicable market stress scenario. Concentration costs are not included in this analysis.
• Credit & Concentration Stress Test: as in the Standard Credit Stress Test, but additionally includes conservative estimates of concentration costs.
• Cover-X Analysis: as in the Credit & Concentration Stress Test, but under the simultaneous default of a customised selection of Clearing Member groups (rather than the Cover-2 population). The purpose of this analysis is to examine whether resources sized against the Cover-2 standard are sufficient to cover the default of other combinations of Clearing Members. It is also intended to identify whether there are combinations of Clearing Member groups whose default leads to losses greater than for the Cover-2 population.
• Opposite Direction Scenario Analysis: as in the Credit & Concentration Stress Test, but under the -1.0x multiplier of the Baseline Market Stress Scenario. This exploratory analysis is intended to assess CCP resilience against shocks which move in the opposite direction to those in the Baseline Market Stress Scenario.

Methodology

The Credit Stress Test methodology aims to reflect the processes and mechanics of a Clearing Member default scenario, based as closely as possible on the applicable regulations and CCPs’ rulebooks.

The Bank collects data from CCPs on financial resources held (including margin requirements and margin collateral, Default Fund contributions, and CCPs’ own capital),^{footnote [15]} Clearing Member and client positions, and on the impact of each of the market stress scenarios on Clearing Members’ and clients’ profit and losses. The Bank relies on CCPs’ models to revalue collateral and positions given the complexity of some of the products cleared by UK CCPs. The Bank validates the data submitted by CCPs against other information sources available.

Using this input data, the Bank assesses the impact on individual CCP Clearing Services’ financial resources under the applicable market stress scenario and default assumptions, following the steps below. Where additional modelling assumptions are required – for example in the estimation of concentration costs – the Bank applies its own bespoke and conservative models.

Step 1 – Calculation of surplus or deficit of resources at the individual account level.

The Bank first calculates the surplus or deficit of resources for each individual Clearing Member house account and client account. This is determined by comparing the profit-and-loss (PNL) impact of the relevant market stress scenario, estimated concentration costs where applicable (refer to Box A for further detail), and the applicable account-level prefunded resources. These calculations are based on margin requirements, rather than total margin collateral, to reflect the possibility that Clearing Members may withdraw excess collateral from CCPs in the run-up to a default event.

Step 2 – Calculation of surplus or deficit of resources at the Clearing Member level

Next, the overall impact for each individual Clearing Member is determined based on the surplus or deficit of resources at each of its accounts, and the relevant account segregation rules. Surpluses and deficits on house accounts are generally aggregated, as CCP rules allow any surplus on Clearing Members’ house accounts to be used to offset any deficits on their client accounts. Balances at client accounts are only aggregated where (i) those accounts have a deficit, and (ii) those accounts are not assumed to be ported (ie transferred) to other (non-defaulting) Clearing Members. This reflects CCP rules which stipulate that any surplus on clients’ accounts must be returned to those respective clients and cannot be used to offset deficits elsewhere.

The Bank considers alternative assumptions regarding CCPs’ ability to successfully port client accounts (detailed in Table B) to assess the impact of successful porting on CCPs’ resilience. Where porting of client accounts is assumed, ported accounts would be moved across to a new Clearing Member with all their positions and resources and so are excluded from the rest of the calculation process.

Step 3 – Calculation of surplus or deficit of resources at the Clearing Member group level

Clearing Members are then grouped together into Clearing Member groups when they are under the same corporate/legal structure and/or have particularly close economic relationships. This reflects the likelihood that all Clearing Members within a Clearing Member group would default together when a default occurs.

The surplus or deficit of resources for each Clearing Member group is then calculated based on the net surplus/deficit of each individual Clearing Member within that Clearing Member group. Under CCPs’ rules, defaulting Clearing Members are resolved separately, even if they are part of the same corporate group. For Clearing Members with a surplus, this surplus therefore cannot be used to offset losses elsewhere in the Clearing Member group. For Clearing Members with a deficit over their margin resources, this deficit is compared against their own Default Fund resources and then aggregated to calculate stressed losses over defaulting members’ resources (SLOMR) at the Clearing Member group level.^{footnote [16]}

Step 4 – Default of selected Clearing Member groups

The Credit Stress Test methodology can test any combination of defaulting Clearing Member groups. The initial focus is on the default of the Cover-2 population, which is determined algorithmically for each CCP clearing service by calculating losses for every potential pair of defaulting Clearing Member groups.^{footnote [17]}

This is complemented by the Cover-X Analysis, which considers the default of customised populations of Clearing Member groups. This includes an analysis of the system-wide Cover-2 population, defined as the two Clearing Member groups whose default leads to the greatest aggregate SLOMR across all CCP Clearing Services. It also includes populations of Clearing Member groups based on common characteristics, such as entity type or industry, and based on Clearing Members’ probability of default.

Step 5 – Calculation of depletion of financial resources held under CCPs’ default waterfalls

After selecting the defaulting Clearing Member groups, the resulting SLOMR are compared to the other resources available to each CCP Clearing Service under their default waterfalls. These resources are drawn upon in the following order:

• Skin in the Game (SITG): CCPs’ own capital set aside to absorb default losses beyond defaulters’ own resources 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 CCP Clearing Service to cover default event losses, where these losses exceed the mutualised Default Fund.^{footnote [18]}

Results

Standard Credit Stress Test

Chart 1 shows the results of the Standard Credit Stress Test. The lower panel of the chart shows SLOMR, while the upper panel shows how this translates into relative depletion of CCPs’ default waterfalls. Results are shown for all three porting assumptions in Table B.

Only two CCP Clearing Services (ICEU F&O and LME Base) experience any SLOMR under a Cover-2 default. However, both CCP Clearing Services have adequate prefunded resources to cover these default losses, and only LME Base experiences any depletion of mutualised Default Fund contributions. Defaulters’ own resources (Initial Margin and Default Fund contributions) are sufficient to cover losses in the Baseline Market Stress Scenario at all other CCP Clearing Services.

Consistent with the Bank’s previous CCP SST exercise, a relaxation of porting assumptions (Table B) can have a material impact on results, where client clearing represents a relatively greater share of clearing activity. Across ICEU F&O and LME Base, SLOMR are almost completely eliminated when all client accounts are assumed to successfully port to non-defaulting Clearing Members.

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

Baseline Market Stress Scenario, CCP 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 Powers of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’, B = ‘Segregated client accounts port’, and C = ‘All client accounts port’.

All CCP Clearing Services experience less depletion of mutualised Default Fund contributions compared to the Bank’s previous CCP SST exercise. This is despite a more severe Baseline Market Stress Scenario in the 2023 CCP SST. This predominantly reflects an increase in financial resources at most CCP Clearing Services, as the market volatility of 2022 fed through CCPs’ risk models and risk management into increases in Initial Margin requirements and Default Fund sizing between the conclusion of the Bank’s previous CCP SST exercise and the 2023 CCP SST reference date.^{footnote [21]}

Initial Margin is sized to cover defaulters’ losses at a certain level of confidence. As risk fundamentals in a market increase it is therefore a feature of CCPs’ models that Initial Margin requirements will increase to ensure collateralisation keeps pace with the changing risks. Likewise, Default Fund sizing can also increase as new stress events enter the stress scenario libraries. The increase in CCPs’ financial resources in the 2023 CCP SST and resulting improvement in results in the 2023 CCP SST therefore confirms the UK clearing system responded as it was expected to following the periods of market volatility in 2022.

While CCPs’ Initial Margin models have an unavoidable procyclical element – in that they reflect changes in the risk fundamentals in markets – it is important that this necessary pro-cyclicality does not add unnecessarily to a system stress and that positions remain collateralised efficiently. In this context, the Clearing Member and Client Analysis component of the 2023 CCP SST (Section 8) considers the potential liquidity demands that Clearing Members and clients would face through Initial Margin calls in the Baseline Market Stress Scenario. The Bank is also working with other international regulators to evaluate the responsiveness of CCPs’ Initial Margin models to volatility and market stresses, and to explore appropriate ways to analyse and compare Initial Margin procyclicality in different settings.

Chart 2 shows the Bank’s estimates of the total stressed losses of all Clearing Members in the 2023 CCP SST, compared to the Bank’s previous CCP SST exercise. Overall, the scale of total losses was broadly unchanged, as the increase in scenario severity was partially offset by some de-risking in Clearing Member’s positions. However, the increase in both Initial Margin requirements and Default Fund sizing since the Bank’s previous CCP SST exercise has meant a greater share of these total stressed losses are covered by defaulters’ own resources in the 2023 CCP SST. In turn, this has reduced the relative size of SLOMR for each Clearing Member, and therefore the depletion of the mutualised Default Fund at each CCP Clearing Service.

Chart 2: Standard Credit Stress Test results

Aggregate stressed losses, Baseline Market Stress Scenario ^{(a) (b) (c) (d)}

Footnotes

• (a) Stressed losses are aggregated across all Clearing Members in the 2021–22 CCP SST and 2023 CCP SST respectively. The Bank’s measure of aggregate stressed losses is an estimate calculated under simplifying assumptions.
• (b) Initial Margin represents stressed losses absorbed by Clearing Members’ own Initial Margin.
• (c) Defaulters’ Default Fund (DF) contributions represents stressed losses absorbed by Clearing Members’ own mutualised Default Fund contributions.
• (d) Stressed losses over defaulting members’ resources (SLOMR) represents aggregate stressed losses beyond Clearing Members’ Initial Margin and mutualised Default Fund contributions. In the event of a default, these losses would need to be covered by (in order of application): CCP SITG, non-defaulters’ Default Fund contributions, and Powers of Assessment.

Credit & Concentration Stress Test

Chart 3 shows the results of the Credit & Concentration Stress Test, in which the Bank’s conservative estimates of concentration costs are additionally included. Inclusion of concentration costs can have a material impact on resource depletion, increasing SLOMR of the Cover-2 population by many multiples for some CCP Clearing Services relative to the Standard Credit Stress Test.

Two CCP Clearing Services (ICEU F&O and LME Base) experience partial depletion of mutualised Default Fund contributions when concentration costs are included. Again, both maintain adequate prefunded resources against a Cover-2 default. CCP SITG is sufficient to cover SLOMR at both LCH SwapClear and LCH ForexClear, while defaulters’ own resources remain sufficient to cover losses at all other CCP Clearing Services. Porting continues to have a material effect on results where client clearing represents a relatively greater share of clearing activity.

As in the Credit Stress Test, all CCP Clearing Services experience smaller overall depletion of the mutualised Default Fund relative to the Bank’s previous CCP SST exercise (Annex A), despite the more severe Baseline Market Stress Scenario. Again, this is predominantly driven by an increase in CCPs’ financial resources but also reflects lower concentrations of exposures in the Cover-2 population.

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

Baseline Market Stress Scenario, CCP 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 Powers of Assessment (PoA). PoA represents the total amount of non-prefunded resources that CCPs can call from non-defaulters.
• (e) A = ‘No porting’, B = ‘Segregated client accounts port’, and C = ‘All client accounts port’.

While an increase in Initial Margin requirements has led to improved results for each CCP Clearing Service in both the Standard Credit Stress Test and Credit & Concentration Stress Test, this increase in Initial Margin has partially unwound at some CCP Clearing Services since the 2023 CCP SST reference date. This is consistent with a subsequent normalisation of market conditions and reduction in volatility.

To understand how this might affect the results in the Credit Stress Test, the Bank has carried out sensitivity testing against changes in the size of Initial Margin requirements, Default Fund contributions and positions since the 2023 CCP SST reference date.^{footnote [22]} This analysis suggests that, while they would experience an increased depletion of prefunded resources, CCPs would continue to be resilient to the Baseline Market Stress Scenario if the 2023 CCP SST was re-run on an updated reference date.

Cover-X Analysis

To complement the analysis of results under a Cover-2 default, the Bank uses ‘Cover-X’ analysis to explore the impact of a wider range of defaulter combinations. Chart 4 illustrates the results of Credit Stress Test in the Baseline Market Stress Scenario under four alternative defaulter combinations – when also including concentration costs – in addition to results under a Cover-2 default:^{footnote [23]}

• System-wide Cover-2: default of the two Clearing Member groups whose default generates the largest SLOMR across all CCP Clearing Services in aggregate under the Baseline Market Stress Scenario.
• Non-financial Cover-X: default of all Clearing Members groups defined as non-financial entities.
• Non-bank Cover-X: default of all Clearing Member groups defined as non-bank entities.
• Probability of Default Cover-X: default of all Clearing Member groups with a one-year probability of default greater than 0.2%.

All CCP Clearing Services have sufficient prefunded resources to cover default losses under each of these Cover-X default assumptions. No LCH Clearing Service experiences losses over defaulter resources, and so these results are excluded from Chart 4. ICEU F&O experiences default losses that are lower than under a Cover-2 default in each of the Cover-X assumptions. Losses at LME Base are greater than under a Cover-2 default when assuming the default of all non-financial Clearing Member groups, of all non-bank Clearing Member groups, or of all Clearing Member groups with a one-year probability of default greater than 0.2%, but only result in moderate depletion of mutualised Default Fund contributions.

These results predominantly reflect differences in membership at each CCP Clearing Service, rather than any particular issues with risk management. Specifically, both ICEU F&O and LME Base membership consists of a greater number or proportion of non-bank and non-financial entities compared to LCH’s Clearing Services.