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The Bank of England has proposed a tiering scheme to assess the systemic risks posed by non-UK central counterparties operating in the UK.
These proposals arise from the Bank of England acquiring new powers following the UK’s exit from the European Union.
Non-UK CCPs can currently provide services in the UK under a temporary recognition arrangement, but when this regime expires non-UK CCPs will need to be authorised by the Bank of England under the on-shored European Market Infrastructure Regulation (EMIR).
Under the proposed tiering arrangements, incoming CCPs will be assessed on the basis of the potential systemic risks that they pose to UK financial stability.
This will be based on three primary criteria.
First, whether the incoming CCP has a minimum of £10 billion of UK clearing member initial margin (IM).
Second, whether it has a minimum of £1 billion in UK clearing member default fund contributions.
Third, whether the incoming CCP has an interoperability arrangement in place with a UK-based CCP.
The Bank will conduct a more detailed assessment on any incoming CCP that falls into one or more of these categories.
An incoming CCP that is not classed as “systemically important” will be classed as a Tier 1 CCP and will not pass to the next stage of the tiering assessment.
For CCPs that do progress, the Bank will conduct an “informal reliance assessment” to assess whether it can rely on home supervision of the incoming CCP. The Bank says that where a jurisdiction is committed to meeting its expectations with respect to cooperation, reliance and information sharing with respect to a large CCP, then the Bank will deem the CCP to remain under home authority supervision.
The Bank of England will expect higher standards of trust and cooperation from home authorities where the UK share of total IM or default fund contributions is larger than 20 per cent.
CCPs that do not qualify for home authority supervision under the “informal reliance assessment” will be classified as Tier 2 CCPs and required to meet UK standards under on-shored EMIR. They will then be subject to direct supervision by the Bank of England.
Under EMIR Article 25(2c), the Bank may also advise HM Treasury that it imposes “location regulations” in cases where an incoming CCP is of particularly high systemic importance to the UK.
When these location regulations are applied, the CCP may only provide specified clearing services to UK-based clearing members and trading venues if these services are delivered from within the UK.
John Cunliffe, Bank of England deputy governor for financial stability, says: “ The Bank’s approach to incoming CCPs is built upon the principle of deference to other regulator’s regimes — where justified — and a proportionate but diligent approach to overseeing the risk channelled from overseas CCPs. This allows the market to maximise the benefits from access to cross-border clearing while ensuring the risks are managed appropriately.”
The Bank has issued a consultation paper and draft statement of policy to review the tiering proposals. The consultation will close on 25 February 2022, with the intended implementation date for the final policy set for 1 July 2022.
