LONDON (Reuters) - The European Union’s markets watchdog began its third stress test of 16 clearing houses on Wednesday, saying it was adding a new requirement and that three British clearers won’t take part if there is a no-deal Brexit.
Clearing houses stand between the two sides of a stock, bond and derivatives trade, ensuring its safe and swift completion even if one side goes bust.
The European Securities and Markets Authority (ESMA) said the new component will assess the impact of liquidation costs or ability of a clearing house member to sell large positions to raise funds in stressed markets.
Clearing houses have grown since the financial crisis a decade ago, after regulators ruled that swathes of the derivatives market must be cleared to increase transparency and safety.
But that raised concern that some clearing houses were now too big, meaning their failure would bring down the financial system. Consequently, regulators introduced “stress tests” to see whether they could cope with theoretical shocks without taxpayer handouts.
“ESMA’s stress tests continue to evolve, we have built on the knowledge acquired in the first two exercises and have added a new component on concentration risk to ensure the exercise is fit for purpose,” ESMA chair Steven Maijoor said in a statement.
ESMA said that if Britain leaves the European Union without a deal, the three UK clearing houses currently included in the test would not take part.
London-based LCH, part of the London Stock Exchange Group, is one of the world’s biggest clearing houses, and clears most euro-denominated interest rate swaps. LCH has a subsidiary in Paris, which is also being tested.
The other two UK clearers are ICE Clear Europe and LME Clear.
Clearing houses must already show regulators they could survive their two biggest members going bust, but EU policymakers worry the sector is not regulated enough.
Results of the test will be published in the second quarter of 2020.
Reporting by Huw Jones; editing by Louise Heavens, Larry King