Climate risk and central counterparty risk management

Andrew Bryan, Fernando Cerezetti, Karl Klasén, Owen Thorpe, Teo Floor, Hardy Wenge, Max Chan and Rafael Plata

Abstract

In today’s world, the word “climate” is sure to strike a conversation wherever you go; equally so in the world of clearing houses, where the risks arising from the climate, or “climate risk”, are examined. In this paper, the European Association of CCP Clearing Houses discusses several aspects of climate risk, beginning with an overview of the various types of climate risk, such as physical and transitional effect risk, discussing how these are currently integrated into the key activity of central counterparty (CCP) stress testing. This then leads to a brief overview of the metrics within climate risk. The key questions here are how climate risk metrics are developed, used and disclosed across the industry. Lastly, the paper discusses the possible future business impact of climate risk and looks forward at how central counterparties will adapt to a changing climate in the coming years and decades in order to continue to contribute to safe, robust and transparent financial markets.