Stress testing has become a prominent topic since the last disruptions in the financial markets and its importance as a valuable risk management tool has increased significantly. This is also reflected in various regulations for financial market players such as banks and central counterparties (CCPs). The latter especially received policymakers‘ attention in order to ensure the economic stability and transparency of financial markets.
In light of these changes, Eurex Clearing has adapted its stress testing framework to connect state of the art risk management expertise with evolving regulatory requirements. This makes Eurex Clearing a reliable partner for our clients as well as for policymakers in order to ensure the highest safety of financial markets in a complex and fast moving environment.
One central part of the stress testing framework is to connect regulatory requirements with our stress scenarios and aggregation methodology. In order to achieve prudent results, each portfolio is stress tested against a comprehensive set of historical and hypothetical scenarios across all asset classes, products and risk factors. Read more about stress scenarios and exposure aggregation.
Another core element of stress testing is verifying the adequacy of the CCP’s pre-funded financial resources. Regular calibration and daily tests of the Default Fund size are part of this activity. Read more about Default Fund dimensioning.
In order to mitigate the risk that Eurex Clearing’s prefunded financial resources are insufficient compared to stress testing results, assuming the default of at least the two largest Clearing Members (“cover-2” stress tests), pre-defined operational thresholds have been established and are continuously monitored. We initiate risk mitigating actions whenever a threshold is breached. Risk mitigating actions can vary from member-specific actions to a general increase of Default Fund contributions for all members. Read more about risk mitigating actions.
In addition to testing the pre-funded financial resources, the resilience of the CCP is also reviewed regularly by performing reverse stress tests. This variant of stress tests reveals the maximum number of participants, which can default in a given scenario before the CCP is not viable anymore. Read more about reverse stress testing.