LONDON, July 5 (Reuters) - Clearing houses in the European
Union have shown they can withstand extreme shocks, including
the impact of Russia's invasion of Ukraine on commodities
markets, the bloc's securities watchdog said on Tuesday.
Clearing houses are the essential plumbing of financial
markets, ensuring that securities or derivatives trades are
completed, even if one side of a transaction goes bust.
A stress test of 15 clearing houses showed they can meet
their basic requirement of being able to continue operating even
after their two biggest members go bust, the European Securities
and Markets Authority (ESMA) said in a statement.
Gaps, however, were identified between the necessary and
available buffers for certain risks at some clearing houses,
particularly in commodity derivatives markets, ESMA said in its
fourth stress test of the sector.
"Keeping in mind the limitations of the exercise, this could
indicate an insufficient coverage of concentration risk," ESMA
said. "Commodity derivatives and emission allowances show
overall lower concentration add-ons."
Clearing houses typically require add-ons in cash or margin
calls to be posted against a position to mitigate any
concentrated risks when there are big price moves.
The test including two clearers based in London - LCH and
ICE Clear - which serve customers in the European Union.
Russia's invasion of Ukraine in February triggered huge
price moves in commodity markets, raising concerns among
regulators about whether the sector was sufficiently regulated.
Trades in nickel cleared by London's LME Clear hit a record
high and one spike in prices prompted the metals exchange to
temporarily suspend trading and nearly double its default fund.
LME Clear was not part of the EU stress test.
The stress scenario used by ESMA was tougher or comparable
in severity for most asset classes, apart for some commodities,
to the stresses seen in the early days of the Ukraine war, ESMA
"Finally, with respect to operational resilience, a series
of areas and entities have been identified where further
supervisory attention should be put in order to assess
discrepancies in the measured levels of operational risk," ESMA
(Reporting by Huw Jones; Editing by David Clarke)