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Highlights:
- Increased Losses Noted: Major UK clearing houses reported larger losses in the latest Bank of England stress test compared to the previous year.
- Resilience Maintained: Despite vulnerabilities, ICE Clear Europe, LCH Ltd, and LME Clear Ltd remained resilient under stress scenarios.
- Potential Risks Identified: The Bank of England plans to further scrutinize the potential vulnerabilities related to highly concentrated positions.
In its latest financial system stress test, the Bank of England has identified some vulnerabilities in major clearing houses, including ICE Clear Europe Ltd, LCH Ltd, and LME Clear Ltd. The stress test, which aims to evaluate the resilience of financial institutions under extreme scenarios, revealed that these clearing houses experienced larger losses compared to the results from last year's simulation.
Clearing Houses Show Resilience Despite Challenges
The report highlights that, despite the increased losses, all tested clearing houses demonstrated resilience, continuing to facilitate payments between banks effectively. The Bank of England's Deputy Governor for Financial Stability, Sarah Breeden, noted that the results do not raise immediate concerns but warrant ongoing monitoring.
Addressing Concentrated Risk Positions
A key issue identified in the stress test was the impact of highly concentrated positions held by the clearing houses. The Bank of England expressed that extending the stress test scenarios to include the costs associated with liquidating these positions under more conservative assumptions shows potential areas of vulnerability. These findings will form a part of the ongoing supervision and dialogue with the central counterparties (CCPs) to enhance their risk management practices.
Ongoing Supervision and Future Tests
The Bank of England plans to continue its rigorous assessment of CCPs through regular data collection and supervision. This approach aims to ensure that clearing houses enhance their capabilities to handle financial stress and mitigate risks associated with market volatility and concentrated exposures.
This proactive supervision strategy reflects the Bank's commitment to maintaining the stability of the UK's financial infrastructure and protecting the broader economy from systemic risks. Future stress tests will likely focus on refining scenarios and assumptions to better capture potential vulnerabilities and ensure that clearing houses are prepared for a range of adverse conditions.
