ISDA Responds to ESMA on CCP Climate Stress Testing

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.

Documents (1) for ISDA Responds to ESMA on CCP Climate Stress Testing

Credit Derivatives Trading Activity Q2 2025

This report analyzes credit derivatives trading activity reported in Europe. The analysis shows European credit derivatives transactions based on the location of reporting venues (EU versus UK) and product type. The report also compares European-reported credit derivatives trading activity to...

Recognition of Cross-product Netting is Critical

US regulators are in the process of making important changes to the regulatory capital framework by proposing modifications to the enhanced supplementary leverage ratio, which should help stop it from acting as a non-risk-sensitive constraint on bank capacity – a...

ISDA, GFXD Response to FCA on SI Regime

On September 10, ISDA and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association responded to the Financial Conduct Authority's (FCA) consultation paper CP25/20 on the systematic internalizer (SI) regime for derivatives and bonds. ISDA and the...