Trends, Risks and Vulnerabilities report released by ESMA, highlights the resilience of CCPs with limited procyclicality affects to the market

The second report in a series titled, “Trends, Risks and Vulnerabilities” (TRV) was released by the European Securities and Markets Authority (ESMA); the EU’s securities markets regulator, on 2nd September 2020.

The report provides a detailed analysis of the impact that COVID-19 has had on the financial markets throughout the first two quarters of 2020 and provides a risk assessment of key industry areas which include financial market infrastructures and services. A public virtual webinar will be held on the 9th of September 2020 to present and discuss the key research within the report.

The TRV report provides comments on the current economic-rebound following the high volatility within the markets during Q1 2020 and explores whether the rebound is sustainable given the aftershock of COVID-19 on the globe. The report further highlights ESMA’s cautionary stance, where it states that there is a “potential decoupling of financial market performance and underlying economic activity”.

Whilst the overall ESMA remit outlook may be uncertain, what remains clear within the report (Section: Market Monitoring, Infrastructure, and Services, page 20), is that Central Counterparties (CCPs) proved to withstand the shock of the turbulent market volatility within the margin and with minimal impact to their clearing members. The TRV mentions: “Market infrastructures faced heightened activity during the sell-off, as volumes and volatility soared. Trading venues coped with increased trading volumes amid a higher share of lit trading, as investors sought certainty of execution during the time of liquidity stress. Central Counterparties (CCPs) proved resilient throughout the period, despite the surge in clearing activity coupled with the sharp rise in initial and variation margins.

Throughout the crisis, there were a number of intra-day margin calls (mark-to-market) observed. Some CCPs increased the initial margin where appropriate, in order to provide further stability to clearing members and the wider market. Within the European Union (EU), the data highlights that the EU central clearing framework was “never put under critical stress”. The excess collateral held against clearing member’s positions acted as a “cushion limiting procyclicality of margins” and overall the central clearing system at CCPs proved to be robust as it was designed. A testament to the successful margin methodologies and appropriate CCP mechanics during a period where CCP’s themselves were working under stressed business continuity plans.

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