The Bank of England has today launched its first public supervisory stress test of UK central counterparties (CCPs.)

The exercise will take place later this year and will continue into 2022 with the clearing services of all UK CCPs, including ICE Clear Europe Limited, LCH Limited, and LME Clear Limited.

The stress test will explore the system-wide credit and liquidity resilience of UK CCPs.

This will include examining the consequences of CCPs’ actions for other parts of the financial system and assessing the systemic effects associated with all UK CCPs responding to the same stress events at the same time.

The bank said that the exercise would be “exploratory in nature”, with the findings used in conjunction with feedback to its recent discussion paper.

The test will include both a credit component and a liquidity component. The credit component will test the sufficiency of CCPs’ resources to withstand a combination of market stress scenarios and clearing member defaults.

The liquidity component will test the ability of CCPs to service all relevant cash requirements under a combination of market stress scenarios and the default and non-performance of clearing members and service providers.

“Both the credit and liquidity component will include an examination of concentration costs in order to take into account the additional costs that might occur if CCPs liquidate large directional exposures into stressed markets in short periods of time,” said the bank in a statement.

The exercise will include the application of four market risk scenarios that are increasing in severity and are each linear functions of one another. The exercise will also be used to examine a range of default assumptions across both the credit and liquidity components.

Reverse stress testing will be used to examine the impact of increasingly severe assumptions regarding market stress severity, concentration costs, and the number of defaulters on CCP resilience. Reverse stress testing will also be used to test combinations of assumptions that are likely to deplete CCP resources beyond normally accepted levels.

The findings of the stress test will be published in Summer 2022.

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