Clearing in the 2020s: the Bank of England's approach to policy reform and international cooperation - speech by Sasha Mills

Given at ISDA Derivatives and Trading Forum
Published on 07 November 2023
Sasha Mills discusses the importance of the Financial Services and Markets Act (FSMA) 2023 and how the Bank will adapt to the new regulatory architecture to support the UK’s dynamic, and globally important, clearing industry. 


Good afternoon, it is a great pleasure to be here at the ISDA derivatives trading forum. Thank you to ISDA for hosting this event. We appreciate ISDA’s feedback – your input is always thoughtful and considered, thank you for that as well.

I’m here to talk to you about the future of the UK’s post-trade regulatory framework, as we look to enact changes provided for in the Financial Services and Markets Act (FSMA 2023).

The post-Global Financial Crisis push for enhanced regulation and supervision of derivatives markets has been a success story. Higher rates of central clearing have improved transparency, and incentivised more robust risk management in markets which underpin the wider financial system, like the swaps markets. In areas where contracts are cleared bilaterally, more rigorous standards were applied to limit risks to financial stability.

The Bank has, is, and will remain committed to ensuring the UK’s clearing markets are among the most robust and resilient around the world.

The Bank played a significant role in ensuring the success of the post-crisis reforms. Internationally, we contributed to the development of the new regime, i.e. the PFMIs and EU legislation, and domestically by advocating for (and taking on) direct supervision of CCPs and CSDs in line with our objective to protect and enhance UK financial stability.

The Bank was also the first authority to establish Global Crisis Management Groups for CCPs to provide a framework for authorities to plan crisis management measures (including orderly resolution) for CCPs that are judged to be systemically important in more than one jurisdiction.

In the period since then, and especially the last few years, we’ve seen various episodes that have seriously tested the regime, and I’m happy to note that UK CCPs have – to a very large extent, managed well.

Still, as ever there have been plenty of lessons to learn, both domestically and internationally. We’ve had episodes like the ‘dash for cash’ of March 2020, stresses across LDI funds, and unprecedented volatility in various markets, perhaps most notably in the energy and commodity markets in the run up to and following Russia’s invasion of Ukraine, and a changing monetary policy backdrop. In that context, perhaps we could have expected even more stress across markets and firms. We have previously shared some reflections from these events, and those continue to inform how we approach our work.

We are now entering a new phase. As you heard from Richard earlier, FSMA 2023 looks to implement the most significant change to how the UK implements regulation in at least a decade, and for FMIs perhaps ever.

I know that change creates uncertainty, so I wanted to take this opportunity to set out the framework for creating the UK rulebook for CCPs/CSDs.

FSMA 2023 changes enable the UK to maintain the highest international standards

One point I would like to be abundantly clear about from the outset, however, is that whilst the process for implementing standards is changing, our approach and commitments to the standards themselves remains unmoved. And that commitment is underpinned by our significant experience supervising CCPs as the IMF noted in its most recent Financial Sector Assessment Program (FSAP).footnote [1]

A key component of this is our supervisory stress tests of CCPs. The IMF has called the UK stress testing regime ‘robust’, and notes the UK’s contribution to improving international practice in terms of modelling default scenarios.footnote [2]

The results of our 2022 stress tests highlighted the overall resilience of UK CCPs to stress scenarios, and we are not standing still. Our 2023 stress tests, due to be published tomorrow, include scenarios which encompass the stress events of 2022.

The evolution of our stress tests highlights the UK’s unwavering commitment to implementing international standards, as we have done with the PFMIs.

The changes to FSMA 2023 provide yet another example of this commitment through an enhanced CCP resolution regime.

In line with our approach to being a dynamic and flexible regulator, the new regime provides the Bank (as Resolution Authority) with a broader suite of tools to ensure any UK CCP can be resolved quickly and effectively.

The new domestic resolution regime will only apply to UK CCPs, we recognise that some of the tools could have an effect far outside our borders. Prior to using any of our resolution tools on a CCP that is part of a group (which currently includes all three UK CCPs), the Bank will have to consider the effect of using any of those tools on the financial stability of other jurisdictions, especially countries where other members of that CCP’s group operates.

The regime will also include a robust No Creditor Worse Off (NCWO) safeguard. Any creditor of a CCP would be eligible for compensation to the extent that it is less favourably treated in a resolution than it would have been if the CCP was taken into insolvency after using its recovery actions. This will, importantly, apply equally to all the CCP’s creditors, irrespective of their location.

The UK is among the first jurisdictions with systemically important CCPs to implement a resolution regime which provides this level of flexibility through the tools and options available.

These tools and resources are also consistent with the FSB’s recently proposed toolbox approach to alternative financial resources in resolution – which the Bank has played a leading role in developing.

The consultation on that approach is ongoing and closes in the next few weeks, and the Bank will of course review the final conclusions in detail.footnote [3]

Broader changes to the framework from FSMA 2023

The new legislation also provides a change in how we update rules and implement updated international standards. Let me expand on that now.

Under the new legislation, rather than rulebooks being set out in primary and secondary legislation, the Bank will receive a new general rulemaking power over CCPs and CSDs. We will use this to set requirements through our rulebooks, operating within a framework established by government and Parliament.

Currently, many changes to firm-facing requirements require legislative amendment. With the new rulemaking power, the Bank will be able to respond transparently, and without delay, to emerging risks to financial stability, should the existing application of international standards to firms need to be updated or improved.

We should not understate the importance of this point. CCPs and CSDs are systemically important and critical to the functioning of the financial system, and so it’s right that the Bank, with our objective of protecting financial stability, can deliver a nimble, effective, and forward-looking regulatory regime.

In designing our rulebook we want to be as transparent as possible and to set out to the industry the fundamental principles that underpin the rulebook and what we expect of firms.

Therefore, we are exploring proposing ‘fundamental rules’ that would underpin the whole regime and so help firms anticipate how we will assess their compliance with more specific rules. Setting out how we would expect firms to operate supports our objective to protect financial stability in a similar way to those introduced by the PRA for the firms they regulate.

Other examples of how we could use this power in the short term include updating our domestic requirements as new international standards and guidelines are developed. One area that springs to mind is the upcoming BCBS-CPMI-IOSCO consultation on proposals to increase transparency and evaluate the responsiveness of margin models in centrally cleared markets.footnote [4]

I do want to emphasise that, as you and I would expect, our new powers to create a rulebook are not unfettered. I already mentioned the accountability framework we will be working to, and I’d like to expand on that now.

First, FMI regulation and supervision will be governed by a Financial Markets Infrastructure Committee, a statutory committee which will take over from our current, non-statutory, FMI Board. We will also receive from Parliament a new secondary objective and will need to consider new regulatory principles when developing policy. These principles include the need to ensure proportionality of any new rules, and the desire to foster sustainable growth in the medium to long term - consistent with the UK’s net zero commitment.

We will also be increasing our engagement with Parliament, to increase the transparency of our work and so they can continue to hold us to account.

But perhaps most importantly given the UK’s role as an international financial centre, the Act explicitly recognises the Bank’s responsibility to the wider, global financial system.

The IMF has called UK financial stability a ‘global public good’,footnote [5] a description which gives even greater importance to our long-standing commitment, and indeed our statutory responsibility, to protect and enhance UK financial stability. The Bank has always interpreted this objective in the broadest possible sense – recognising that our actions can have global consequences that can boomerang back and affect UK financial stability.

The legislation requires that in any exercise of the rulemaking power, the Bank must consider the effects of those rules on the financial stability of any country where a CCP or CSD provides services. This must of course be done in a non-discriminatory manner, that is, in a way that does not favour one jurisdiction over another.

The Bank has always recognised that the interconnectedness of global markets means that any shocks in one part of the world can quickly reverberate and cause stress at home, and so we welcome changes to the legislation which codify this responsibility in law.

I’d like to focus on two of the new accountability measures in a bit more detail.

We will have a requirement to conduct a thorough Cost Benefit Analysis (CBA) on the proposed new rules. Some of these CBAs will be subject to scrutiny by a new, independent CBA panel which will cover the PRA and the Bank in its capacity as supervisor of CCPs and CSDs.

This is important in part as we know that the costs and benefits of regulatory measures can be unevenly distributed, and these changes will help to ensure that our CBAs are as robust as possible. The panel will also provide recommendations for how regulators can improve their methodology and overall approach to CBA.

As previously mentioned, the Bank will receive a new secondary objective to, where possible, facilitate innovation within FMI services, as we advance our primary financial stability objective. I’d like to talk about how we interpret this objective.

The Bank remains committed to maintaining an outcomes-based regulatory model, with these outcomes being rooted in our primary statutory objective to protect and enhance UK financial stability. We do not see this secondary objective as a deviation or a distraction from that primary objective. Rather, we see it as recognition that in an ever-changing world, innovation can bring benefits to the efficiency, functionality and resilience of the financial system.

Whether by design or necessity, the ways in which firms operate and the services they offer will always need to evolve with the world around them. It is therefore right that we look to support innovation and change that, in the words of the legislation, can “improve the quality, efficiency, and economy of the services” offered by FMIs.

The new objective recognises the role that the Bank can play in facilitating progress in this area. In the words of our former DGFS Jon Cunliffe, we cannot simply assume that new ideas and solutions are necessarily dangerous, simply because they are different.footnote [6]

Our upcoming agenda

So far, I’ve talked about our overriding principles and commitments as a regulator of globally important CCPs, and some of the new tools we have to implement our standards. Now, I’d like to talk about some of our priorities for the coming years. As I suspect you will appreciate, it’s a big agenda and so we will have carefully to sequence our work.

We have agreed with HMT that the first priority for applying the new framework will be the ‘repeal and replace’ of EMIR with a more adaptable and dynamic rulebook, which we will aim to progress as soon as possible. With work on CSDR coming later.

As we introduce a UK rulebook for CCPs and CSDs we will consult with the industry and other stakeholders in an open and transparent way in line with the new oversight arrangement I referred to earlier. We will of course eagerly await ISDA’s responses to our consultations.

I don’t want to presuppose the outcome of that process, but I want to make my position absolutely clear – we at the Bank will not lower standards. Nor are we interested in making changes for change’s sake.

The Bank was heavily involved with the development of the current regime – including the PFMIs and EMIR – and as I mentioned earlier, these principles and rules have successfully made the financial system safer and more resilient in the past decade.

With this success in mind, I can tell you we remain committed to the essence of those post GFC reforms. These reforms were agreed multilaterally and changed the international financial system for the better.

For me, the experience of the last decade reinforces the point that to protect financial stability in any one location, a globally responsible regulator must be cognisant of the impacts of their actions on other countries.

As such, any changes to our regime will be considered against this new statutory responsibility, and we will assess how any rule changes could impact the financial stability of third countries. It is absolutely right that our new regime enshrines this principle in statute so that all jurisdictions can have full confidence in our approach – as I alluded to earlier.

Cooperation is key

It’s important to recognise that none of this work can be done alone.

Here in the UK, we of course work very closely with the FCA, who are responsible for supervising exchanges while we are responsible for supervising CCPs. This ‘twin peaks’ regulatory structure has many merits – it has allowed the Bank to focus squarely on the systemic risks that can emerge in cleared markets.

We think this model achieves the right balance for the UK’s context, and allows the Bank and the FCA to use our respective areas of expertise to deliver the right outcomes, based on our respective remits. This is doubly important in the UK context, given the critical importance of the UK financial system to global financial stability.

It is not, however, easy and nor will it be the right model for every country. It requires frequent communication and close collaboration between market and financial stability regulators to share information and coordinate effective supervisory and regulatory action.

We look forward to continuing this work and, building on this strong foundation, are fully committed to ensuring that as markets evolve and lessons are learned, our relationship must evolve with them.

Supervising globally systemic CCPs also requires deep cooperation between authorities across multiple jurisdictions.

We recognised this early. As a global financial centre, the UK is responsible for supervising financial market infrastructure that is used by market participants from around the world. We take that responsibility very seriously, and we have a long tradition of cooperation and openness, which enables coordinated cross-border supervision of these firms.

The Bank established the world’s first CCP colleges in 2012. The global colleges are attended by all relevant authorities including EU national authorities, the ECB and ESMA. 

In 2020 the Bank signed MoUs with the US CFTC and ESMA, which establish that the supervision of UK CCPs is based on close co-operation and mutual respect.

These arrangements have been working well. We engage regularly with ESMA to identify and align on areas of supervisory focus, and we have also just conducted another ‘tabletop exercise’ with US authorities to test how we would engage if a CCP were to find itself in stress.footnote [7]

We also continue to recognise the importance of bilateral engagement and cooperation. Just a few weeks ago, the Bank and the Riksbank re-affirmed our commitment to work together towards the common goal of ensuring that UK based CCPs continue to support sound markets and financial stability around the world. footnote [8]

This is an excellent example of what I’ve been talking about so far.

We know that UK CCPs, especially LCH, provide services which are critical to the stability of the Swedish financial markets, and we know that through strong cooperation and robust information sharing, we and the Riksbank can work together to ensure that any risks associated with cross-border clearing are mitigated.

More broadly, and building on the extensive and successful cooperation that already takes place in the context of UK CCP’s activities around the globe, the Bank of England's regime for supervising non-UK CCPs that offer services in the UK is similarly underpinned by principles of proportionality and deference.

Since implementing this regime, we’ve recognised two European CCPs – Cboe Clear and Eurex Clearing. And where an important non-UK CCP is well-regulated and is supervised by authorities with whom we have a robust cooperative relationship, the Bank will place reliance on the supervision of those home authorities. This approach makes the financial system safer as it reduces complexity and limits the need for firms to do business in a substantively different way across different jurisdictions.


I’ve covered a lot of ground today and want briefly to wrap up. My key message is that while the way in which rules in the UK are put into force will change, the spirit and objectives of those rules will remain unchanged. FSMA 2023 ensures that the UK rulebook will be able to keep up to date with international standards, maintain robust standards which can mitigate emerging risks as they crystalise, and reflect the Bank’s role as custodian of a globally important, international financial centre.

I am grateful to Barry King, Stephen Longden, Daniel Wright, Ania Szerszen, Karam Kaur and Hassan Nasser for their help in preparing these remarks. I am also grateful to Sarah Breeden, Jon Cunliffe, Samuel Marsham and Chandima Wijerathna for their helpful comments and support.