A “fire drill” is taking place this week among global central counterparties (CCPs) to test default management procedures.
The Amsterdam-based Global Association of Central Counterparties (CCP-Global) is coordinating the first global test, which will review the readiness of CCP staffs, procedures and IT systems for a major firm default.
While CCPs typically perform their own annual fire drills and some regulators have arranged multi-CCP tests, this is the first global exercise, involving 31 CCPs around the world. Another 15 CCPs will be involved as observers and may participate in future global tests, CCP-Global said.
The test involves the failure of a hypothetical top-five clearing firm — dubbed ACME (A Clearing Member Everywhere) — for each CCP.
“The aspects tested by each CCP should cover their core default management actions, including portfolio evaluation, simulating risk reduction and re-balancing (trading, hedging, and/or auctions), communication channels and any relevant technical tools,” CCP-Global said in a paper outlining the test.
The global fire drill is intended to “help identify potential operational bottlenecks in the procedures, such as the fact that they may solicit non-defaulting clearing members at the same time,” said the European Securities and Markets Authority (ESMA), which is coordinating the participation of various European CCPs in the drill.
In addition to helping spot vulnerabilities, the exercise is expected to benefit financial stability by identifying best practices for default management among CCPs, ESMA added.
A report setting out insights from the test for global regulators and standards setters is expected in the first quarter of 2024.