Derivatives industry cautiously optimistic on UK clearing proposals

Bank of England says it will not "politicise" how it supervises non-UK CCPs

12 November 2021


The derivatives industry has received the Bank of England's proposals on the tiering and supervision of non-UK central counterparties with cautious optimism.

Unveiling the proposals at an FIA event on 8 November, the Bank of England's Christina Segal-Knowles, executive director for financial market infrastructure, said non-UK CCPs offering services to UK-based clients will fall under a new tiering regime that will rely on the strength and reliability of cooperation and information sharing arrangements with home authorities.

"A key feature of our approach to tiering is an 'informed reliance test'," said Segal-Knowles.

Bruce and Christina
Bruce Savage and Christina Segal-Knowles

"Where a jurisdiction has a robust regulatory and supervisory framework and is clearly committed to meeting our expectations with respect to cooperation, trust and information sharing, we will deem that CCP Tier 1. In other words, we will not bring that CCP into direct UK supervision, provided that we can see on a continuing basis that its home regulators are delivering the outcomes we need to protect UK financial stability."

Reaction to the Bank's proposals has generally been positive. Damian Carolan, partner - financial services regulation at Allen & Overy, said the proposals were "well-considered" and attempt to address industry concerns voiced during the EU's development of its regime for the supervision of non-EU CCPs.

"Safety and openness are at the heart of the UK proposals," Carolan told MarketVoice. "But equally, there is a clear recognition of the cross-border nature of CCP business and the importance of maintaining that with cooperation and proportionality at the heart of delivering that in practice."


When the UK left the EU, it onshored EMIR 2.2, the EU's market infrastructure regulation, and transferred the responsibility for tiering, recognising and, where needed, supervising non-UK CCPs to the Bank of England. HM Treasury, meanwhile, has assumed responsibility for the equivalence process in deciding whether overseas authorities have the same standard of supervision as the UK.

"Contrary to any rumours about divergence, we are implementing EMIR 2.2," Segal-Knowles told FIA's head of Europe, Bruce Savage, who moderated the discussion. "The Bank has taken on the responsibility to set the policy for how we will determine which CCPs pose systemic risk to the UK, and it is those policies on which we are consulting today."

She added that in designing its policies, the Bank's guiding principle was "safe openness", with three key features to its approach.

The first is that the regime is designed to be risk-based, with size as the starting point. The Bank will consider supervising a non-UK CCP directly, meaning it will place it in the Tier 2 category, if the CCP has more than a £10 billion threshold of initial margin holdings or £1 billion in default fund contributions from UK clearing members, or any interoperability arrangements with UK counterparts.

However, Segal-Knowles emphasised that this was the starting point, which is where cooperation, the second feature of the Bank's approach, comes into play.

The Bank will undertake an "informed reliance assessment" to consider to what extent it is able to rely on home regulation and supervision, and the strength and reliability of cooperation and information sharing arrangements in place with the home authority.

Segal-Knowles highlighted this as notable in the Bank's approach. "Putting cooperation at the centre allows us the opportunity to think not just about the risks posed by size, but also the risks on a more holistic and net basis," she added.

Where a jurisdiction is committed to meeting expectations regarding cooperation and information sharing with respect to a large CCP, the Bank will deem that CCP Tier 1, meaning it will remain under home authority supervision. 

Those that do not meet these expectations would be classified as Tier 2 and would either be subject to direct supervision by the Bank or granted "comparable compliance" with supervision from their home authorities, as outlined in a separate consultation paper published the same day.  

While a third tier, where international CCPs are subjected to a location policy, is technically part of the framework of the onshored EMIR 2.2., Segal-Knowles said the Bank is not contemplating the use of a Tier 3 category currently.

She added that the consultation includes a table showing the criteria that will be used for the tiering model to provide predictability.

"It's not just that we're applying some level of judgement and are able to move CCPs around in our tiering system," she said. "It's that we're providing a way to take a more holistic net risk approach to tiering."

The third feature of the Bank's approach is proportionality. The Bank will have higher expectations of cooperation from home authorities of CCPs where the UK proportion of total initial margin or default fund contributions is greater than 20%. 

Julia Smithers Excell, a partner in the financial services regulatory team at law firm White & Case, said that while the proportionality feature of the Bank's tiering approach is welcome, the focus of firms and their regulators will likely be on the Bank's informed reliance assessment of regulators' ongoing commitments to meet relationship expectations.

"They will also focus on the list of key criteria for these which the Bank has set out in its consultation and will likely note the Bank's comments that the list is non-exhaustive and that it may take other relevant considerations into account," Smithers Excell said.

At the event, Segal-Knowles also discussed how the UK fares as the home supervisor of some of the world’s largest CCPs.

"The UK has long been recognised as a world leader in the regulation of clearing services, and we have time and time again stressed that we are committed to maintaining at least the current levels of resilience for CCPs," she said. "Our plan is not to weaken but strengthen that regime."

EU clearing stance 

In remarks outside the prepared speech, Segal-Knowles addressed the controversy surrounding the EU's stance on clearing, which aims to shift euro clearing to the continent from the UK.

"It's important that these things are not politicised," she said, adding that the UK will operate in "a very technocratic and predictable way."

On 10 November, Mairead McGuinness, European commissioner for financial services, announced that the EU will extend its temporary equivalence decision allowing European banks to access UK CCPs beyond June next year to help avoid "a cliff edge".

Her announcement was welcomed by FIA and industry participants who had previously warned the Commission about the negative financial and operational impacts on EU counterparties and clearing members if it allowed the equivalence decision to lapse.

While the length of the proposed extension was not disclosed, McGuinness said it "should be long enough to allow us to revise the EU supervisory system for CCPs" to encourage more activity to move into the bloc. McGuinness plans to propose the extension in early 2022.

The UK's LCH still clears about 90% of all euro-denominated derivatives, according to a recent white paper from CEPS, a Brussels think tank, which cited market data provided by Osttra.

"This proposed way forward strikes a balance between safeguarding financial stability in the short term…and safeguarding financial stability in the medium term – which requires us to reduce this risky over-reliance on a third country," McGuinness said.

Speaking about the approaches the EU and the UK have taken on cross border clearing, Carolan says both jurisdictions endorse similar underlying principles of international openness and safety. However, he adds that the "mood music" surrounding those concepts is very different.

"The EU still expressly aspires to significantly enhanced onshore EU CCP infrastructure as a key part of its preferred solution. The UK on the other hand expresses a more holistic attempt to support and regulate cross-border CCP services effectively by way of cooperation and suitable oversight, whichever direction of travel the business takes."

Savage said on the webinar that FIA supports the overall goal of ensuring clearing services to UK market participants are appropriately regulated and supervised and will be responding to the consultation on behalf of members.

A video of Christina Segal-Knowles' presentation on the Bank of England's proposals and her conversation with FIA's head of Europe, Bruce Savage, can be viewed here:

The Bank's consultation on its approach to tiering incoming central counterparties under EMIR Article 25, can be accessed here.

The Bank's consultation on its approach to comparable compliance under EMIR Article 25, can be accessed here.

The consultations close on 25 February 2022.

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