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BoE finds prospective vulnerabilities in financial market pipes

The Bank of England stated on Friday that a tension test of central counterparties (CCPs). companies that form a key part of the pipes of financial. markets did find some vulnerabilities but overall showed. durability.

The tension test focused on the credit strength of the. clearing services supplied by ICE Clear Europe, LCH -. part of LSEG, and LME Clear, which is owned by Hong. Kong Exchanges and Clearing Ltd.

The tension test results do not suggest that this is a cause. for concern, however we continue to keep track of CCPs resources through. continuous information collection and supervision, Bank of England Deputy. Governor Sarah Breeden stated.

LME Clear, the clearing house of the London Metal Exchange,. was found to be most susceptible of the three to the tension test,. based on an escalation of geopolitical and trade stress. culminating in an upward shock to commodities markets.

The tension test was not a pass or fail exercise, and did not. take a look at CCPs' liquidity or the larger effect of their failure,. which will be evaluated separately.

The BoE stated the central counterparties, which are involved. in the cleaning and settlement of monetary trades, were tested. against a situation that included market tension similar to the. biggest taped plus the default of two of the biggest CCPs.

Some CCPs were discovered to be holding fewer financial resources. than at the time of a previous stress test in 2022, which took. location after a duration of market turmoil, the BoE said.

When we extend the tension test to consist of the cost of. liquidating extremely focused positions and more conservative. presumptions, we identify some prospective locations of vulnerability,. which we will check out with CCPs as part of our continuous. supervision, Breeden stated.

LME Base - part of LME Clear which focuses on base metal. trading - was vulnerable to a default by two members with big. focused positions and would require to draw on extra. resources in this scenario, the BoE said.

The reserve bank stated this conclusion was delicate to the. specific assumptions about liquidation expenses, and it would follow. this up with LME, which had actually increased pre-funded resources considering that. the test date.

We ... are delighted that LME Clear performed robustly. regardless of the stress test scenarios not being tailored to metals. market characteristics, the LME stated.

Over the last 18 months we have actually executed steps to. even more reinforce the durability of our cleaning home and are. currently seeking advice from on further improvements.

LME's base metals clearing was identified as vulnerable in. 2022's stress test, after it needed to suspend nickel trading. previously that year.

In July, the BoE introduced a consultation for new post-Brexit. rules for central counterparties and other comparable businesses.

(source: Reuters)