The Bank of England has today published a Policy Statement and a Statement of Policy on its approach to ‘tiering’ non-UK central counterparties (‘incoming CCPs’) based on the level of risk they could pose to UK financial stability.
CCPs lie at the heart of the financial system, providing crucial functions that help the economy and financial markets operate. They are key to financial stability. They improve the efficiency and stability of financial markets by placing themselves in the middle of trades between buyers and sellers and guaranteeing their performance to each other on certain transactions. Central clearing has grown significantly as a direct and desirable result of the reforms that were put in place after the financial crisis. CCPs operate across borders to serve a wide range of financial firms over many jurisdictions. This provides significant financial stability benefits through deeper pools of liquidity, reduced concentration risk, and reduced fragmentation in regulation and supervision, as well as reducing costs and increasing efficiency for users.
However, the international nature of CCPs means that risks can also be transferred across borders if not properly managed. This is particularly the case for the UK as an open and global centre for financial services, as many institutions based here access clearing services from CCPs across the world. The Bank sees effective cross-border supervision of CCPs as requiring an approach which is risk-based, cooperation-centric and proportionate.footnote  Of these features, close international cooperation among authorities and the ability of host authorities to rely on home authorities, where justified by the quality of the home authority’s supervisory regime is particularly critical to avoiding unnecessary complexity and fragmentation. This is crucial so that overlapping or conflicting requirements do not, in themselves, create financial stability risks.
Today’s Statement of Policy on tiering follows the Bank of England acquiring new powers as a result of the UK’s withdrawal from the European Union. Currently incoming CCPs can provide services in the UK under a temporary recognition regime. After this expires, incoming CCPs will need to be recognised by the Bank under the on-shored European Market Infrastructure Regulation (‘EMIR’).
The Bank's approach to tiering incoming CCPs places a high degree of emphasis on deference and reliance by the Bank on CCPs' home authorities to regulate and supervise CCPs, where this is possible. The incoming CCP tiering process – guided by the principle of “safe openness” - was designed to facilitate deference where the Bank judges that there is effective regulatory and supervisory cooperation. The approach consisted of three major features; it was designed to be risk-based; place cooperation at the heart of tiering decisions; and ensure it is proportionate.
Incoming CCPs will be assessed to establish the degree to which they might pose risks to UK financial stability. As part of this process, for large and for interoperable CCPs, we will assess whether we have a sufficiently deep cooperative relationship to place informed reliance on the CCP’s home authority. An incoming CCP that is designated Tier 2 (where that CCP is systemically important or likely to become systemically important for the financial stability of the UK) can be subject to direct UK supervision and regulation. An incoming CCP that is designated Tier 1 will not be subject to direct UK supervision and regulation. CCPs for which the Bank has determined that it is possible to place an informed reliance, appropriate to the risks, on a CCP’s home authority will be designated Tier 1.
The implementation date for the final policy on tiering and comparable compliance is Thursday 1 December 2022.
Details of tiering approach
This assessment will often involve several steps. CCPs will initially be triaged against the following indicators
- whether the incoming CCP held at least £10bn of UK clearing member initial margin;
- whether the incoming CCP held at least £1bn of UK clearing member default fund contributions; or
- if the incoming CCP has an interoperability arrangement in place with a UK CCP.
An incoming CCP that does not meet any of these criteria will usually be classified as a Tier 1 CCP under EMIR.
For incoming CCPs that meet one or both of the first two triage criteria, but not the interoperability criterion, the Bank will assess the proportion of total initial margin and default fund contributions attributable to UK clearing members (the ‘proportionality test’). Where both the initial margin and default fund contributions attributable to UK clearing members are below 20%, the Bank will undertake a Level 1 informed reliance assessment to determine if the Bank is able to place reliance on the incoming CCP’s home authority’s regulation and supervision.
An interoperable CCP will not be subject to the proportionality test and the Level 1 informed reliance assessment and will move forward to the next stage of the process.
For those incoming CCPs that are above the 20% thresholds and/or for which the Bank’s expectations for Level 1 informed reliance have not been met, as well as for interoperable CCPs, the Bank will undertake a systemic risk assessment. This is to assess factors relating to the incoming CCP that may impact its systemic importance to the UK and to inform a possible Level 2 informed reliance assessment.
Where an incoming CCP is considered potentially systemic to the UK financial stability according to the systemic risk assessment, the Bank will conduct a Level 2 informed resilience assessment. This is more intensive, requiring a higher degree of supervisory co-operation, and will determine the extent to which the Bank is able to place reliance on the incoming CCP’s home authority’s regulation and supervision. Where the Bank’s expectations for the Level 2 informed reliance have not been met, the incoming CCP will usually be classified as Tier 2.
A Tier 2 CCP is required to meet specific UK standards under EMIR and will be subject to direct supervision by the Bank. There may, however, be specific regulatory provisions for which these CCPs can be granted ‘comparable compliance’, and the UK can defer its supervision in these areas to the CCPs’ relevant home authorities, as outlined in the Statement of Policy on comparable compliance published today.
Notes to editors
7. The Bank has also published its proposals on fees for the recognition and annual monitoring of incoming CCPs and incoming central securities depositories (‘CSDs’). The Consultation Paper on the Bank’s approach to charging fees for the recognition and monitoring of incoming CCPs. The Consultation Paper on the Bank’s approach to charging fees for the recognition and monitoring of incoming CSDs. The consultation period for the proposed policy on fees for incoming CCPs and CSDs closes on Thursday 15 September 2022 and the proposed implementation date is Thursday 1 December 2022.