Bank of England reveals ‘tiering’ approach to CCP risk

The UK’s central bank has published a consultation paper and draft statement of policy on its approach to tiering non-UK central counterparties (CCPs) based on the level of systemic risk they could pose to financial stability.

Under the tiering proposals, incoming CCPs would be assessed against a number of indicators, including whether they hold at least £10 billion of UK clearing member initial margin, whether they held at least £1 billion of UK clearing member default fund contributions, or if the incoming CCP has an interoperability arrangement in place with a UK CCP.

The Bank will undertake a more detailed assessment of CCPs if they meet one or more of these indicators.

The Bank of England said that central clearing has grown significantly because of the reforms put in place following the financial crisis and that CCPs operate across borders to serve a wide range of financial institutions across many jurisdictions.

The bank added that while this provides significant financial stability benefits through deeper pools of liquidity, reduced concentration risk, and reduced fragmentation in regulation and supervision produce, the international nature of CCPs means that risks can also be transferred across borders if not properly managed.

According to the central bank, the UK is at particular risk because it is an open and global centre for financial services, with many firms based here accessing clearing services from CCPs across the world.

Today’s proposals follow the bank taking on new powers following the UK’s withdrawal from the EU.

Currently non-UK CCPs can provide services in the UK under a temporary recognition regime. In order to continue to provide services in the UK after the temporary regime expires, non-UK or ‘incoming’ CCPs will need to be recognised by the Bank under the on-shored European Market Infrastructure Regulation (EMIR).

“As a leading global financial centre, with numerous CCPs conducting their business activity in the UK, we require a robust and transparent framework for managing cross-border risks,” said deputy governor for financial stability, Jon Cunliffe. “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 appropriately managed.”

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