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Bank of England central counterparty stress tests confirm resilience
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LONDON (Reuters) – The Bank of England on Wednesday said results of stress tests on central counterparties (CCPs) showed continued resilience at the businesses, which help clear and settle trades in financial instruments and commodities essential for the global economy.
“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,” said Sarah Breeden, the BoE’s Deputy Governor for Financial Stability.
The stress tests covered three central counterparties which operate in Britain, ICE Clear Europe Limited, LCH Limited, a part of LSEG, and LME Clear Limited, owned by Hong Kong Exchanges and Clearing Ltd.
The BoE said the tests did not operate on a pass or fail model, and instead aimed to explore the central counterparties’ resilience to credit and liquidity shocks like those which occurred in the energy, metals and UK rates markets in 2022.
However, under one extreme credit scenario, which went beyond historic precedent and minimum regulatory standards, one central counterparty clearing service, LME Base, did experience “full depletion of both prefunded and non-prefunded resources”, the BoE said.
The BoE said it would use the findings “to support and inform its ongoing supervision and regulation of UK CCPs”.
(Reporting by William James and David Milliken; editing by Sarah Young)
Stress tests are simulations used to evaluate the resilience of financial institutions or systems under extreme economic conditions, assessing their ability to withstand financial shocks.
Financial stability refers to a condition where the financial system operates effectively, with institutions able to manage risks and absorb shocks, preventing systemic crises.
Liquidity risk is the risk that an entity will not be able to meet its short-term financial obligations due to an inability to convert assets into cash quickly.
Credit risk is the possibility of loss due to a borrower's failure to repay a loan or meet contractual obligations, impacting lenders and financial institutions.
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