Watchdog launches latest stress test for Europe's clearing houses

The European Union’s markets watchdog is launching its latest stress test of clearing houses, with City firms such as LCH only included if the UK does not crash out of the bloc.

The European Securities and Markets Authority said its third stress test of the 16 central counterparty (CCP) clearing houses authorised by the EU would include a new element. It will assess if a clearing house can sell large positions without having to raise funds in stressed markets.

Clearing houses are vital elements in the trading of stocks, bonds and derivatives, and ensure trades go through even if one side goes bust. Stress tests are designed to confirm they can withstand financial or economic shocks – such as the 2008 financial crisis – without going under or seeking bailouts.

Steven Maijoor, chair of the ESMA, said: “CCPs are systemically important and ensuring their resilience is critical for the stability of the entire financial system.

"ESMA’s stress tests continue to evolve, we have built on the knowledge acquired in the first two exercises and have added a new component on concentration risk to ensure the excise is fit for purposes.”

Three UK clearing houses – the London Stock Exchange-owned LCH, Intercontinental Exchange-owned ICE Clear Europe and Hong Kong owned LME Clear – are currently scheduled to be included in the test. However, they will be dropped from the exercise should the UK quit the EU without a deal.

The Bank of England has warned that financial services faces costly disruption in the advent of a no-deal Brexit, and so far, there has been no firm agreement on how the clearing house sector will operate after the UK leaves the bloc. Current regulations ban European companies from using non-EU clearing houses unless they are specifically recognised by Brussels.

Results of the test will be published in spring 2020.