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.
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....
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