The Bank of England’s power to direct a central counterparty to address impediments to resolvability

1: Introduction

1.1 The Bank of England (the Bank) published a consultation paper^{footnote [1]} (CP) in July 2024 describing its proposed approach to exercising its power to direct a central counterparty (CCP) to address impediments to resolvability under paragraph 2, Schedule 11 to the Financial Services and Markets Act 2023 (Schedule 11). This document provides feedback on responses to the consultation.

1.2 The Bank is the United Kingdom’s resolution authority for CCPs^{footnote [2]} and the power to direct CCPs to address impediments to resolvability under Schedule 11 applies to UK-based CCPs. This power does not apply to CCPs which offer services in the UK but which are established in a country other than the UK. The Bank also has a new power to direct a parent company of a CCP to establish a separate holding company for specific purposes, if the CCP is a subsidiary of a company incorporated in the UK.

1.3 The Bank received written and verbal feedback on the CP and draft statement of policy (SoP) from CCPs and trade associations representing clearing members. Respondents were generally supportive of the proposals and welcomed the detail provided by the Bank. Some responses suggested where additional clarification or information would be useful. The section below summarises the feedback received and provides the Bank’s responses to the points raised, noting where the Bank has amended the proposed SoP to reflect comments.

2: Feedback to responses

2.1 The Bank’s responses to the feedback received are set out below.

Approach to the Bank’s use of its power

2.2 Respondents were broadly supportive of the Bank’s proposed approach and the level of detail shared in the CP and draft SoP on the process it would follow. Most respondents noted that the process to engage with CCPs seemed reasonable and that the CP provided useful context on the Bank’s considerations. Most respondents noted that the timescales for engagement with CCPs on impediments and potential remedial measures seemed broadly appropriate. However, some respondents suggested that there should be flexibility to reflect circumstances where additional time may be warranted, for example, to discuss remedial measures with regulatory authorities in other jurisdictions.

2.3 As noted in the CP, the power to direct a CCP to address impediments to resolvability is an important power to ensure that CCPs are ‘resolvable’. This means that it is feasible and credible to place a CCP into resolution without excessive disruption to the financial system, interruption to the provision of critical economic functions, or exposing public funds to losses. In this context, the Bank would seek to be proportionate and pragmatic in how it uses the power and the time it provides to CCPs to respond at different stages of the process.

2.4 A period of generally four months is specified in the SoP for the development of remedial measures by the CCP is what the Bank expects to apply generally and in most circumstances. The SoP also specifies a period of generally one month for the CCP to submit a plan setting out how it will achieve the remedial measures to the Bank. At its discretion, the Bank may increase or decrease either period, based on its assessment of what would be proportionate considering the facts of each scenario and the impacts on financial stability. This means that the Bank may provide more than four months for a CCP to develop remedial measures as set out in Section 2.5 of the SoP and more than one month to submit an implementation plan as set out in Section 2.7 of the SoP. In exceptional circumstances, as previously communicated, the Bank may provide less than four months and one month respectively. However, in accordance with Schedule 11 of FSMA 2023, the CCP will have a reasonable time to make representations to the Bank about the direction and a right of appeal once the notice confirming the direction is issued. All other legislative obligations on the Bank in relation to the process for giving a direction would also apply.

2.5 The Bank has amended the SoP to clarify that the periods for the respective actions by the CCP may be increased.

Publication of directions

2.6 Several respondents queried whether the Bank would publish directions issued under paragraph 2, Schedule 11 and requested information on the circumstances in which publication would occur. Respondents also noted that the Bank will need to be mindful of the disclosure obligations that may be applicable to the entities that have listed equity or debt securities or otherwise form part of listed groups.

2.7 The Bank may choose to make its directions public, if appropriate and depending on the circumstances at the time, and in accordance with applicable law. The Bank confirms that in each individual case it will assess the circumstances at the time before making any direction public. The Bank will decide whether to make any direction, or any information about the direction, public depending on whether the publication would assist it in exercising its public functions as the UK CCP resolution authority and in accordance with the statutory confidentiality regime applicable to it. The Bank would expect to inform the affected entity in advance of making any direction public.

2.8 The Bank has amended the SoP to confirm in Section 3.6 the factors it will consider in deciding whether to make a direction public.

Approach to resolvability assessment of CCPs

2.9 Several respondents commented on areas relating to future policy development work on the Bank’s approach to resolvability assessment of CCPs. For example, one respondent encouraged the Bank to consider the extent to which outcomes of resolvability assessment may be communicated to the public, as is the case for resolvability assessments of banks. Another respondent suggested that further guidance on what the Bank considers to be an impediment to resolvability would be useful.

2.10 As noted in the CP, the Bank intends to develop its approach to assessing resolvability of UK CCPs consistent with international standards. The Bank will consider feedback received from this consultation and will engage further with stakeholders in due course.

Engagement with industry and other regulators

2.11 Two respondents suggested that the Bank provide more information on how it would engage with industry, particularly clearing members and clients, on the impediments identified and potential impacts of remedial measures that the Bank may require. One respondent further suggested that the Bank specify when and how it would engage with authorities in other countries as well as other UK regulators.

2.12 The Bank recognises the broader market environment in which a CCP may operate, including for example, linked financial market infrastructures (FMIs) and cross-jurisdictional arrangements. The Bank may, on a case-by-case basis, engage with industry to seek views on any impediments identified and potential remedial measures if appropriate, subject to applicable confidentiality requirements.

2.13 As noted above in paragraph 2.3, the Bank would seek to be proportionate and pragmatic in how it uses the power. Paragraph 2(4), Schedule 11 requires the Bank to have regard to the potential impact of the direction on the CCP and market for financial services, as well as the financial stability of the UK.

2.14 As noted in the CP, the Financial Stability Board Key Attributes of Effective Resolution Regimes states that home authorities of FMIs that are systemically important in more than one jurisdiction (SI>1) should maintain a Crisis Management Group (CMG). The Bank has established CMGs for the two SI>1 UK CCPs. Among other responsibilities, the Bank expects to work with CMG members to assess the resolvability of each of these CCPs, in line with international standards. We would also seek to engage with other non-CMG authorities depending on the circumstances of the impediment and remedial measures being considered.

2.15 Where the Bank has not established a CMG for a CCP, the Bank would expect to engage with other authorities as appropriate, depending on the circumstances of the impediment identified and potential remedial measures.

The Bank’s objectives

2.16 Several respondents welcomed the Bank’s articulation of its policy objectives when exercising the power to direct a CCP to address an impediment to resolvability and highlighted that guidance on the Bank’s approach enhances public confidence in the UK financial system.

2.17 One respondent shared their view that the SoP provides certainty and transparency on the Bank’s robust approach, which is critical given the systemic importance of the UK financial market infrastructures and their global clientele. Another respondent suggested that the Bank should provide additional public guidance on this power to maintain public confidence in the UK financial system, and to offer reassurance to non-UK based market participants and authorities. In particular, they recommended the Bank outline how it would consider the impact of the exercise of this power on the markets served by UK CCPs.

2.18 As CCP resolution authority, we must have regard to our special resolution objectives which are set out in legislation, including the objectives of continuity of clearing services and financial stability in the UK.^{footnote [3]} As described below, the Bank expects to provide further details on its approach to CCP resolution, include use of its powers and tools. The Bank highly values international co-operation and engagement with other jurisdictions on CCP resolution to achieve this. The Bank recognises that the global markets in which UK CCPs operate are deeply interconnected. Furthermore, when it is considering the exercise of a stabilisation power in respect of a CCP which is member of a group, as all UK CCPs are, the Bank must have regard to effect of the exercise of the power on the financial stability of countries other than the UK in which any member of that group is operating.^{footnote [4]}

Approach to CCP resolution publication

2.19 One respondent welcomed the Bank’s CP on its use of the power to direct CCPs to address impediments to resolvability and noted that it would welcome a broader publication by the Bank on its general approach to CCP resolution. The Bank notes this feedback and confirms that it intends to publish a document setting out its approach to CCP resolution in due course.

3: Conclusion and implementation

3.1 The Bank has considered all feedback received and has made changes to the final SoP as described above.

3.2 This document fulfils the legislative requirement to prepare a SoP. The final SoP will enter into effect from 19 December 2024 and in accordance with paragraph 2 (12), the Bank will be able to use the power from this date.

3.3 The Bank will keep the SoP under review and update it where appropriate to reflect policy developments or changes in the Bank’s approach.