Default simulation exercises

Clearing member default simulations, often called “default simulations” or “fire drills”, may be performed at least annually by CCPs to confirm the readiness of a CCP’s default management structure. The purpose of a default simulation is to check that operationally, the plans that a CCP and its participants have in place for managing an actual member default are fit for purpose. Such tests are distinct from stress testing which validates the financial resources of a CCP.

During these simulations, CCPs test the operational readiness of their staff, procedures, IT systems, clearing members and clients, or part thereof. CCPs may also conduct a more limited scope of fire drills, such as testing new members, staff or systems, particularly new systems. Furthermore, CCPs may also conduct broader business continuity tests, and these may overlap in part with member default simulations. Certain CCP Global members have conducted simulations with other CCPs. Some regulators have also arranged occasionally for multi-CCP default simulation exercises.

Multi-CCP default simulation exercises

Default management simulation exercises provide an opportunity for CCPs and clearing members to test the operational viability of the default management procedures (“DMP”) as established by the individual CCPs. Such exercises, conducted by different CCPs in isolation, may not reflect the operational stress faced by CCPs and their clearing members, or the interplay of actions by multiple CCPs, in the event of a default by a common clearing member facing multiple CCPs. Multi-CCP default simulation exercise is a solution to test such operational aspects.

Such an exercise will generally assume the defaulting clearing member is common to multiple CCPs, and the default will cascade or occur around the same time at other CCPs. Further hypothetical commonalities in the scenarios and product classes cleared may be built to assess more in-depth interactions between CCPs and non-defaulting participants in the DMP. This type of joint exercise can help identify potential operational bottlenecks in the DMPs (such as the execution of hedges and auctions, and the liquidation of collateral) when they are initiated by multiple CCPs concurrently.

2023 CCP Global – International Default Simulation (“2023 CIDS”)

The 2023 CIDS was the first multi-CCP default simulation exercise coordinated with collective industry efforts by CCPs through an association. Multiple international regulators were consulted, and CCP Global and its members were highly appreciative of their collaboration and further guidance. A total of 31 individual CCPs (consisting of CCP Global member and non-CCP Global member CCPs) committed to participating actively to conduct fire drills in November 2023, starting on 13 November if practical. All participating CCPs completed their DMP by 22 November. In addition, 15 CCP Global members indicated interests in joining as observers for the 2023 simulation and may potentially take a more active role in future exercises.

Participating CCPs conducted their respective default simulations under a high-level common narrative. A hypothetical defaulting clearing member, whose name is A.C.M.E (“A Clearing Member Everywhere”), is assumed to be one of the 5 largest clearing members as defined by each CCP. CCPs defined their own scenarios and created the defaulting clearing member’s portfolio(s), with the asset classes and scope they would like to include into the simulation. During the drill, CCPs followed their own internal DMP. The aspects tested by each CCP covered 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.

The 2023 CIDS aimed to (i) provide a chance to share default management best practices among CCPs, (ii) identify areas of potential interest for follow-on work, in particular assisting CCPs that do not conduct regular simulations, and (iii) highlight fire drill insights for SSBs and regulators in post-exercise deliverables, including a report summary and a workshop planned in Q1 2024.