Bank of England focuses on trade war in 2025 stress test of central counterparties

By David Milliken

LONDON (Reuters) -The Bank of England said on Friday it will focus on a scenario involving a market panic about a trade war and sovereign debt risks in this year's stress test of central counterparties, which form a key part of global financial infrastructure.

The stress test covers ICE Clear Europe, LCH Limited which is owned by LSEG, and LME Clear Limited, owned by Hong Kong Exchange and Clearing, and will model the default of two or more members during a severe market stress.

The BoE said the test was "intended to represent extreme market moves over a period of two to five days in which there is escalating concern about fragmentation in global trade and sovereign debt risks".

The scenario would include a big fall in share prices, higher expectations for central bank interest rates and divergent moves in commodities prices, the BoE added.

The results of this year's test will be published in the final quarter of the year, and are calculated using prices and participant positions from the end of trading on March 26.

This year's test would not include a full liquidity stress test but would look at liquidity risks alongside the impact of margin calls.

Last year's stress test found some vulnerabilities but overall showed resilience, the BoE said.

LME Clear, the clearing house of the London Metal Exchange, was found to be most vulnerable in that test, which was based on an escalation of geopolitical and trade tensions culminating in an upward shock to commodities markets.

(Reporting by David Milliken; editing by William James)