February 2, 2018 / 6:28 AM / in 3 months

EU clearing house system passes stress test

LONDON (Reuters) - The European Union’s overall system of clearing houses for securities remained resilient to extreme, simulated market shocks, the bloc’s securities watchdog said on Friday.

The results of the second EU-wide stress test showed the system could cope with several users of clearing houses, such as banks, defaulting at the same time coupled with extreme market shocks, the European Securities and Markets Authority (ESMA) said in a statement.

An aim of the test is to see if a collapse of one clearing house could trigger a domino effect across the system.

On an individual basis, Spain’s BME Clearing showed a minor shortfall of required pre-funded resources under one aspect of the test, ESMA said.

ESMA said the shortfall at BME Clearing had no systemic impact.

ICE Clear Europe’s pre-funded resources would be enough, but these would only marginally cover the simulated stress losses, ESMA added.

Clearing houses are backed by pre-funded default funds and stand between two sides of a stock, bond or derivatives trade, ensuring its completion even if one side of the transaction goes bust.

ESMA tested 16 European clearing houses with 900 members such as banks, and holding a total of 270 billion euros in default fund contributions and cash for backing trades.

ESMA Chair Steven Maijoor said that compared with the first stress test in 2016, the latest health check was broadened out.

“The expansion of the stress test to include liquidity risk in addition to counterparty credit risk has provided added reassurance on their resilience,” Maijoor said.

This liquidity part of the test did not detect any major systemic risk concerns, ESMA said.

The watchdog said it was considering whether it should make any recommendations following the stress test results.

Reporting by Huw Jones; Editing by Amrutha Gayathri & Shri Navaratnam

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