Bank of England Outlines 2025 CCP Stress Test Scope

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What is the CCP Stress Test?

The Bank of England has published the key elements of its fourth stress test for UK Central Counterparties (CCPs), scheduled for 2025. The exercise aims to assess the financial resilience of the UK clearing system and enhance transparency, functioning as an exploratory tool rather than a pass-fail assessment. Findings will inform the Bank's supervisory and regulatory activities and identify potential risks.

The 2025 test focuses primarily on the credit resilience of UK CCPs when facing the default of two or more clearing members during severe market stress. It involves a core Credit Stress Test complemented by reverse stress testing and sensitivity analysis using increasingly severe assumptions.

While a full Liquidity Stress Test is not included this year, the Bank plans a qualitative exploration with firms to assess how liquidity risks have evolved since the 2023 exercise, which found all CCPs maintained positive liquidity balances under stress.

The 2025 test will also evaluate the potential impact on the broader financial system through initial margin and variation margin calls on CCP members and their clients, an element not included in the 2024 test due to the concurrent system-wide exploratory scenario (SWES) exercise.

All three UK authorised CCPs – ICE Clear Europe Limited (ICEU), LCH Limited (LCH), and LME Clear Limited (LMEC) – covering six Default Funds and seven clearing services are within the scope of the exercise.

The reference date for the stress test is the end of day Wednesday 26 March 2025, with market prices, member positions, and CCP resources (Initial Margin and Default Fund contributions) fixed as of this date.

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Analytical Components 

The core Credit Stress Test evaluates the adequacy of CCP resources against simultaneous clearing member defaults under the Bank's market stress scenarios.

Starting with the regulatory 'Cover-2' standard, the analysis examines the greatest resource depletion scenario, including concentration costs associated with liquidating defaulters' positions.

Further analysis includes:

• Assessing resource sufficiency against defaults of other member combinations ('Cover-X').

• Testing heightened assumptions for estimating concentration costs.

• Applying multiplier scenarios (1.5x, 2.0x, and -1.0x) to the Baseline Market Stress Scenario to gauge resilience against shocks exceeding historical precedents.

• Desk-based modelling using a wider range of scenarios to identify potential vulnerabilities beyond the core test.

Market Stress Scenarios 

A bespoke 'Baseline Market Stress Scenario' forms the centrepiece, designed by the Bank to represent an extreme but plausible hypothetical event, equivalent to a one-in-3,500 probability relative to historical distributions.

The scenario depicts escalating concerns over global trade fragmentation and sovereign debt risks over two to five days, leading to sharp equity declines, rising interest rate expectations, and varied commodity market movements.

• Innovation Watch: The Bank has revised its scenario generation approach. It now uses a multi-stage process involving Principal Component Analysis (PCA) to reduce dimensionality and a copula (specifically a Student’s T copula) fitted to the principal components to capture non-linear relationships and tail dependence. 100,000 potential scenarios are generated, maintaining historical relationships, and then filtered to select a final scenario that is extreme, plausible, consistent across clearing services, and captures key risks. This approach builds on PCA work used for hypothetical scenarios in the previous year's test.

• Sensitivity & Exploratory Analysis: Three multiplier scenarios (-1.0x, 1.5x, 2.0x applied to baseline shocks) will be used for sensitivity and reverse stress testing, with CCPs required to estimate impacts. The Bank will conduct further desk-based analysis using its own modelling to explore a broader range of theoretical scenarios sampled more randomly from the tail of the generated distribution.

Data Submission and Disclosure 

Participating Central Counterpartys must submit required data using provided templates and instructions, ensuring data quality oversight by senior personnel (e.g., Chief Risk Officer). Submitted data may also inform other supervisory and financial stability functions.

• On the Horizon: The Bank plans to publish a results report detailing the approach, results, and outcomes in Q4 2025. Relevant findings may be shared with other regulatory authorities under existing co-operative arrangements, subject to confidentiality provisions.

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