ISDA welcomes the European Securities and Markets Authority’s (ESMA) work on developing an approach on climate risk stress testing of central counterparties (CCPs) and that ESMA has chosen to consult with the market on its views how to incorporate climate risk into such stress tests.

We agree that climate stress testing for CCPs is different from climate stress testing for banks due to the different time horizon and other idiosyncrasies between these entities, one difference for instance being that CCPs will always have a balanced book.

While ISDA is broadly supportive of ESMA’s planned approach, we make targeted comments to hopefully contribute to ESMA’s thinking on this topic in a constructive manner. For example, ISDA believes that operational and financial risks should be more clearly delineated in ESMA’s framework. While we agree that climate change can and will pose both financial and operational risks, the two should be considered separately. Operational events should be taken into account in CCPs’ business continuity planning, while financial impacts should be incorporated into their stress scenarios.

We welcome that ESMA has performed extensive research of literature and other sources on the topic and that ESMA is also member of the Central Banks and Supervisors Network for Greening the Financial System. We believe that international cooperation is important to develop globally consistent approaches to climate risk stress testing. We appreciate that stress tests used for other types of financial institutions cannot be easily applied due to the much shorter risk horizon applying to CCPs, but propose that the CCP climate risk stress tests should leverage off scenarios that have been developed for other constituencies.

We would also request that ESMA considers how the components of the stress scenario are actually relevant for short term shocks to a CCP’s financial viability rather than components that should be addressed through business planning/strategy review and risk management practices. In setting scenarios for CCPs, there also needs to be a focus on relevancy for the products which EU CCPs offer and EU CCPs’ business models.