February 2, 2018 / 7:01 AM / 10 months ago

UPDATE 2-ICE Clear may need stronger defences, European watchdog finds

(Recasts with details from news conference)

By Huw Jones

LONDON, Feb 2 (Reuters) - Clearing house ICE Clear Europe may need to bolster its defences against extreme market shocks and customer defaults after a sector-wide test of resilience, the European Union's securities watchdog said on Friday.

ICE Clear Europe, part of Intercontinental Exchange, said it will review and incorporate the test results into its stress-testing and risk management framework, as appropriate.

Clearing houses, which process more trades as a result of reforms aimed at making markets safer after the financial crisis, must have a default fund to ensure the completion of a stock, bond or derivatives trade even if one side goes bust.

The European Securities and Markets Authority (ESMA) said the bloc's network of clearing houses for securities showed it could withstand extreme, simulated market shocks.

Its second EU-wide stress test showed the system could cope with several users of clearing houses, such as banks, defaulting at the same time coupled with extreme market shocks, ESMA said.

Clearing houses are required to stress test themselves each day, and the aim of the ESMA check was to see if problems at one clearing house could trigger a domino effect across the system as some banks are users of several clearers.

ESMA singled out two of the 16 clearing houses. It said in a statement that ICE Clear Europe's pre-funded resources would only marginally cover the simulated stress losses.

The test showed that relatively small increases in the number of defaulting groups or in the toughness of the shocks could lead to material breaches of ICE Clear Europe's prefunded resources, ESMA said.

The watchdog said it will discuss the findings with ICE Clear Europe's national regulator, the Bank of England, to work on unspecified follow-up actions and recommendations.

Spain's BME Clearing showed a minor shortfall of less than a million euros in required pre-funded resources under one aspect of the test, ESMA said.

The shortfall had no systemic impact and could have been covered with surplus cash elsewhere at the Madrid Stock Exchange Group at the time of the test.

ESMA tested 16 European clearing houses with 900 members such as banks, and holding a total of 270 billion euros in default fund contributions and cash for backing trades.

ESMA Chair Steven Maijoor said that compared with the first stress test in 2016, the latest health check was broadened out.

"The expansion of the stress test to include liquidity risk in addition to counterparty credit risk has provided added reassurance on their resilience," Maijoor said.

This liquidity part of the test did not detect any major systemic risk concerns, ESMA said. (Reporting by Huw Jones; Editing by Amrutha Gayathri/Shri Navaratnam/Alexander Smith)

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