FSA reviews of credit risk management by central counterparties

11 July 2011

The FSA assesses both applications and existing services against the UK standards for central counterparties in the Financial Services and Markets Act and the Recognition Requirements. This letter provides information as to the way in which FSA assesses compliance with the Recognition Requirements.

The purpose of this consultation paper is to seek views on the process and scope of review the FSA undertakes when assessing the adequacy of the counterparty credit risk management framework within a central counterparty.

The financial crisis has led to a re-evaluation of supervisory approaches and standards, not only in the UK, but also by other major market regulators and by international regulatory bodies. These include the Committee on Payment and Settlement Systems and Technical Committee of the International Organisation of Securities Commissions (CPSS-IOSCO), and the legislative proposal by the European Commission on derivative transactions and central counterparties (EMIR). To this end, the Financial Services Authority (FSA) has previously outlined a more intrusive approach to the supervision of entities it regulates, including Recognised Clearing Houses (RCHs) and Recognised Overseas Clearing Houses (ROCHs).

At the same time, the clearing market is undergoing a period of substantial change. Both market participants and regulators have indicated a desire to increase the scale and scope of financial instruments cleared through central counterparties. Further, increased industry competition and consolidation continues to play a fundamental role in defining the shape of the clearing industry.

The FSA continues to receive a substantial number of applications for new clearing services, and notifications of extensions to existing services. In addition, the FSA is undertaking a rolling programme for review of existing central counterparty services. This paper is in response to industry requests for more detail on this process.

This paper outlines the process the FSA currently undertakes when reviewing the counterparty credit risk framework of central counterparties. As part of this consultation the FSA is seeking views on whether:

• the areas identified are the key areas for consideration in the management of counterparty credit risk; and
• respondents agree that the issues that the FSA has outlined are important components of counterparty credit risk management, and therefore support an assessment of compliance with Part 18 of the Financial Services and Markets Act and the Recognition Requirements.

The deadline for comments is 10 August 2011.

Press release
Full Consultation paper

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