One core element of stress testing lies in validating the sufficiency of the CCP’s pre-funded financial resources. The applicable minimum standards for the Default Fund size are provided in the European Market Infrastructure Regulation (Chapter 3, Articles 42 et seq.) and are further elaborated in the Regulatory Technical Standards published by ESMA. It requires the pre-funded financial resources to withstand the simultaneous default of those two Clearing Members, including affiliates, which pose the largest credit exposure in extreme but plausible market conditions. This minimum Default Fund size is referred to as “cover-2” requirement. The Clearing Member and its affiliates are referred to as “Clearer Group”.
- The actual Default Fund size consists of each Clearing Member’s contribution, which is the maximum of a static and a dynamic component. The contributions are calibrated such that the “cover-2” requirement is fulfilled and an additional buffer is available in order to smooth out market movements. The current values of the static and dynamic component can be found in the Default Funds section and are subject to a regular review.
- While the actual Default Fund size is calibrated on a monthly basis, the coverage of the Default Fund is validated on a daily basis. This is done by comparing the actual “cover-2” requirement against the calibrated Default Fund size. Quantitative information on both can be found in the CPMI-IOSCO quantitative disclosure. To prevent breaches, risk mitigating actions are pursued immediately.
