Ensuring the resilience of CCPs

Foreword

Central counterparties (CCPs) play a vital role in safeguarding the stability of the global financial system. By standing between buyers and sellers in key financial markets, they efficiently manage counterparty credit risk, reduce the cost of financial intermediation, and promote confidence by protecting against potential contagion in stress. The safe operation of UK CCPs is vital for the smooth functioning of both the UK and the international financial system.

The Financial Services and Markets Act 2023, represented a significant milestone for the Bank of England’s regulatory regime for Financial Market Infrastructures (FMIs). In the context of CCP regulation, it provided the Bank with rule-making powers, in order to deliver the Bank’s Financial Stability Objective; and introduced a secondary objective to facilitate innovation in the provision of CCP services. It established the Financial Market Infrastructure Committee (FMIC) as the statutory committee responsible for the regulation and supervision of FMIs including CCPs.

To uphold financial stability, and so support sustainable economic growth, our regulatory framework must be robust, supporting resilient FMIs that support confidence in the financial system. We are also committed to supporting innovation in new and existing FMIs and across the landscape. Innovation brings better services to households and businesses, further supporting growth. So our regulatory framework must be proportionate and adaptable, facilitating safe innovation and, supporting the UK as a dynamic international financial centre.

Our consultation paper sets out our proposals for the new framework. Importantly, we’re not reinventing the wheel here. We believe the existing framework effectively delivers on financial stability effectively so much of it will remain unchanged. Our proposed changes are instead targeted – intended to enhance resilience and promote innovation. In shaping these proposals, we’ve focused on setting clear expectations, maintaining international standards and streamlining regulatory processes to further efficiency and foster innovation.

Looking ahead, we believe the combination of having requirements set in Bank rules and our new powers will allow us to be a more proportionate and flexible regulator. We’re confident that this will help us to continue to uphold financial stability and facilitate innovation, and so support growth.

Sarah Breeden
Deputy Governor, Financial Stability

Privacy Statement

Consent to publication

Chapter 1: Overview

1.1. As global financial markets grow increasingly connected, central counterparties (CCPs) have played a crucial role in enhancing financial stability. CCPs are a type of financial market infrastructure that sit between the buyers and sellers of certain types of financial contracts, replacing the original contract between two parties with two new contracts – one between the CCP and the buyer, and another between the CCP and the seller. By stepping into the middle of these transactions, CCPs guarantee the performance of these financial contracts, effectively ensuring the trades are successfully executed.

1.2. Central clearing through CCPs provides significant financial stability benefits. One of the primary benefits of central clearing is the reduction of counterparty credit risk. This is the risk that one party to a contract ‘defaults’ and cannot meet its obligations. Default can lead to a loss for the counterparty on the other side of the contract. If those losses are severe enough, they may cause the affected parties financial distress which, in turn, can have a knock-on effect for their clients and, more broadly, impact the stability of the financial system.

1.3. Other benefits of central clearing include multilateral netting and mutualisation of risk, which enhance the efficiency and effectiveness of the risk management process. Through multilateral netting, CCPs net the exposures between buyers and sellers, reducing the value of their obligations and thus the amount of collateral that needs to be posted. This lowers overall costs and – at a market participant level – increases funds available for investment, or other productive uses. CCPs also mutualise risk as they provide safeguards against counterparty risk through the collection of margin and mutualised default fund contributions, as well as use of a CCP’s own resources. A default of a clearing member is managed centrally and mutualised to some degree across the members using funds the CCP has already collected. By centralising the default management process, CCPs help prevent the potential cascading effects of defaults, safeguarding market participants and the broader financial ecosystem.

1.4. Central clearing therefore plays a critical role in managing potential contagion and sources of systemic risk. The smooth and safe operation of CCPs is vital for the functioning of international financial markets and financial stability. Robust regulation ensures that CCPs are resilient and operate effectively. Maintaining high standards for CCPs through regular updates to the regulatory framework is essential to upholding a strong and resilient financial system.

1.5. Some of the key elements of the UK regulatory framework for CCPs are set out in the UK European Market Infrastructure Regulation (UK EMIR),^{footnote [1]} which was onshored from the EU. The key provisions relevant to this consultation paper are set out in Titles III to V of UK EMIR and in related technical standards (Annex 1 for the list of technical standards). The Financial Services and Markets Act 2023 (FSMA 2023) granted the Bank of England (the Bank) new rule-making powers for CCPs and central securities depositories (CSDs). These powers enable the Bank to establish a more tailored and flexible regulatory framework by replacing firm-facing requirements from retained EU legislation with its own rules.

1.6. As part of its new rule-making power, the Bank is consulting on proposals to restate certain CCP-facing requirements in UK EMIR in Bank rules, alongside the policy changes outlined in this consultation paper (CP). These proposed policies aim to support financial stability and the economy more broadly, including by increasing the effectiveness of the Bank’s supervisory practices, enhancing the financial resilience of CCPs and encouraging innovation. This CP also contains a discussion section on eligible collateral for posting to CCPs (Chapter 26).

1.7. The Bank, as the UK’s supervisor of CCPs, has a primary objective to protect and enhance the stability of the UK financial system (the Financial Stability Objective).^{footnote [2]} With effect from 1 January 2024, FSMA 2023 amended the Financial Services and Markets Act 2000 (FSMA)^{footnote [3]} to give the Bank the power to make rules applying to CCPs for the purpose of advancing its Financial Stability Objective and, as a secondary objective, facilitate innovation in the provision of services provided by Financial Market Infrastructures (FMIs) with a view to improving the quality, efficiency and economy of the services (the Secondary Innovation Objective).^{footnote [4]} The Bank has also had regard to the factors it is required to consider, including the economic policy set out by the government in its remit letter of 1 July 2025.

1.8. This CP sets out the Bank’s proposed approach to replace most of the requirements that apply to CCPs in UK EMIR and related technical standards with Bank rules and policy materials, including Statements of Policy (SoPs) and Supervisory Statements (SSs) (‘Bank policy material’).

1.9. FSMA 2023 revokes assimilated EU law^{footnote [5]} in the UK relating to financial services, subject to commencement by HM Treasury (HMT).^{footnote [6]} The government has announced that it proposes to commence the revocation of Titles III to V of UK EMIR and related technical standards and has undertaken a policy review to determine what should be restated in legislation. HMT has published the key substantive provisions of a draft Statutory Instrument (SI) proposing to restate with modifications certain provisions of Title III to V of UK EMIR, once the revocation of EMIR takes effect. The Bank and HMT have been co-ordinating closely. The Bank is proposing to use its new power to replace – with Bank rules – the requirements on CCPs (CCP-facing requirements) in Titles III to V of UK EMIR and related technical standards, subject to changes set out in this CP.

1.10. The general intention is to maintain the Bank’s approach to regulation as well as the requirements on CCPs as they currently stand. HMT proposes to revoke Titles III to V of UK EMIR and relevant technical standards at the same time as the Bank’s transfer of the relevant CCP obligations into rules and policy materials.

1.11. This CP is focused on the approach to revoking and replacing the specific CCP-focused elements of UK EMIR as set out in Titles III, IV and V.^{footnote [7]}

1.12. UK EMIR also contains provisions on a range of other areas such as uncleared derivatives and reporting as well as direct requirements on trade repositories and clearing members and clients. HMT intends to take forward changes to other parts of EMIR in due course. HMT anticipates revoking any outstanding clearing member-facing requirements in Titles III to V, and for these to be restated in statute or replaced via regulator rules.

1.13. In addition, Article 31 of UK EMIR requires shareholders or prospective shareholders of a CCP and members with qualifying holdings to notify the Bank of changes in control. HMT intends to restate this requirement in legislation largely as is, however, the provisions have been updated to be more consistent with similar provisions for PRA and FCA authorised firms in Part XII of FSMA. Separately, the Bank is proposing to introduce a similar set of requirements for CCPs through its rules, including ongoing requirements for CCPs to be aware of their shareholder structure and to submit an annual controllers report (Chapter 8).

1.14. The Bank also proposes to restate some policy material originally issued by the European Securities and Markets Authority (ESMA) into Bank rules or other policy material. The Bank’s approach to ESMA guidance is set out in paragraphs 2.8–2.10 of this CP.

1.15. Although this CP is focused on the restatement of Assimilated Law without changing the policy intention, the Bank has identified a small number of areas where policy changes are nevertheless warranted. There are seven areas where the Bank proposes material changes to requirements on CCPs: (i) transparency of margin requirements; (ii) increasing the likelihood of porting of client positions; (iii) adding second skin in the game (SSITG) to the default waterfall; (iv) enhancing the change in control framework expanding the scope; (v) increasing clarity regarding liquidity risk controls; (vi) streamlining and increasing the clarity and proportionality of supervisory processes; and (vii) clarifying the approval process for interoperability arrangements. In addition, the Bank is consulting on certain interpretative and general provisions and on changes to the Bank’s rulebook Glossary.

1.16. This CP represents an important step in converting the UK’s regulatory regime for CCPs inherited from the EU into a framework consistent with the UK’s approach to financial services regulation. For clarity, the evolution of the regulatory regime for clearing leading up to these proposals is set out Figure 1 below.^{footnote [8]}

1.17. The proposed use of Bank rules will enable the Bank to be more responsive to market developments and changing financial landscapes. The updated framework will maintain financial stability while also enabling the Bank to be more innovative and more responsive to emerging trends.

Scope

1.18. The proposed changes set out in this CP will apply to CCPs established in the UK. They will also apply to recognised non-UK CCPs determined by the Bank to be, or to be likely to become, systemically important to UK financial stability^{footnote [9]}. However, the application of certain Bank rules to a systemic recognised non-UK CCPs may be waived or modified where that CCP is given a comparable compliance permission, and the Bank judges that comparable supervisory outcomes are achieved through that CCP’s home regulatory regime^{footnote [10]}. Finally, a very small number of proposed changes set out in this CP will apply to non-systemic recognised non-UK CCPs. Further detail regarding non-UK CCPs is set out at Chapter 25.

1.19. This consultation will also be of interest to other stakeholders, including:

• firms clearing or intending to clear as clearing members or as clients of UK CCPs;
• non-UK CCPs that intend to provide clearing services in the UK, or who currently provide clearing services in the UK under post-Brexit transitional regimes, or who are recognised to provide clearing services in the UK under UK EMIR Article 25; and
• industry groups and trade bodies.

1.20. The Bank is also king views on the range of eligible collateral CCPs should be permitted to accept, including uncollateralised bank guarantees. Chapter 26 is a Discussion Chapter and explores the risks and benefits of expanding the scope of eligible collateral. The Bank is seeking views on how changes to the scope of eligible collateral might impact CCPs and financial market participants. The Bank is including a dedicated chapter on eligible collateral and uncollateralised bank guarantees in this CP since the target audience for both the discussion chapter and policy proposals set out in this CP is the same. Moreover, collateral eligibility is closely linked to other policy areas covered in this consultation, making it an important part of the broader conversation about continuing to evolve the Bank rules for CCPs. Feedback received through this consultation will guide the Bank's approach to eligible collateral. This CP does not include policy proposals on uncollateralised bank guarantees. Any future proposals on permitting this type of collateral will be subject to consultation and cost benefit analysis.

Structure of the CP

1.21. The proposals in this CP are structured into the following chapters:

• Chapter 2: Restatement of Assimilated Law
• Chapter 3: Areas of Policy Reform – Overview
• Chapter 4: Glossary
• Chapter 5: Interpretation and General Provisions
• Chapter 6: Capital Requirements
• Chapter 7: Management and Governance
• Chapter 8: Change in Control
• Chapter 9: Record Keeping
• Chapter 10: Business Continuity
• Chapter 11: Operational Resilience
• Chapter 12: Conduct of Business
• Chapter 13: Exposure Management
• Chapter 14: Margin
• Chapter 15: Default Procedures
• Chapter 16: Default Fund
• Chapter 17: Default Waterfall
• Chapter 18: Liquidity Risk Controls
• Chapter 19: Collateral
• Chapter 20: Investment Policy
• Chapter 21: Supervisory Processes (model reviews, recognition and extensions), Stress Testing and Back Testing
• Chapter 22: Settlement
• Chapter 23: Capital Calculations and Reporting
• Chapter 24: Interoperability
• Chapter 25: Recognition of non-UK CCPs
• Chapter 26: Eligible Collateral – Uncollateralised Bank Guarantees (for discussion)

1.22. The draft rules and related policy materials are included in Annexes 2 to 6.

1.23. For the purpose of this CP, we use ‘CCP rules’, ‘Bank rules’ or ‘rules’ interchangeably to refer to the requirements for CCPs that are being included in Bank rules.

Rule-making instruments

1.24. The Bank proposes to make four instruments in relation to the proposals set out in this CP:

1. the Bank of England FMI Rulebook: Glossary Instrument 2025 – Chapter 4;
2. the Bank of England FMI Rulebook: UK Central Counterparties: Interpretation and General Provisions Instrument 2025 – Chapter 5;
3. Bank of England FMI Rulebook: UK Central Counterparties Instrument 2025 –Chapters 6 to 24; and
4. the Bank of England FMI Rulebook: UK Central Counterparties: Overseas Central Counterparties Instrument 2025 – Chapter 25.

The drafts of these instruments are included in Annex 2 to the CP.

1.25. Annex 7 will contain a transposition table (to be published in due course). It will provide a list of the provisions that the Bank proposes to restate from UK EMIR and the related technical standards. The transposition table will also contain the rule references in Bank rules for those provisions.

Implementation

1.26. HMT intends to lay the SI around the end of 2026 H1, subject to parliamentary time allowing. The legislation will then come into effect via commencement regulations. The SI and the commencement regulations revoking the relevant provisions of UK EMIR will come into force at the same time as the Bank’s new rules.

1.27. The Bank proposes to publish the final policy after considering feedback received as a result of this consultation. The Bank proposes that the final rules will be published no earlier than the end of 2026 H1. Once the rules are published, the Bank proposes that CCPs will have six months to adapt and implement them. The Bank considers that this timeframe should be sufficient for firms to adjust as most existing requirements will remain unchanged.

1.28. The Bank however recognises that some policy changes proposed in this CP may require additional time for CCPs to update their existing arrangements. The Bank is therefore proposing an extended transitional period for compliance with the second skin in the game (SSITG) requirement and elements of the updated margin rules:

1. The Bank is proposing to phase in the SSITG requirement over a period of two years. CCPs would be required to hold 50% of required capital by the end of year one, and fully comply with the SSITG requirement by the end of year two. The Bank considers this timeframe sufficient for CCPs to raise the necessary capital and welcomes views on the proposed transition period.
2. The Bank is also proposing to extend the implementation period for CCPs to comply with updated margin requirements relating to the provision of a margin simulation tool to 12 months from the date rules are published. For clarity, CCPs would be required to comply with the other margin proposals within the standard six-month implementation period and to continue complying with the existing requirements that have been restated in Bank rules without changes.

Responses and next steps

1.29. This consultation closes on 18 November 2025. The Bank invites feedback on the proposals set out in this consultation. Please submit any comments or enquiries using the following CP response link or by emailing: CP_ensuring_the_resilience_of_CCPs@bankofengland.co.uk

1.30. When providing your response, please tell us whether or not you consent to the Bank publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.31. Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.32. Your responses may be shared with HMT and the FCA. This means HMT and the FCA may review the responses and may also contact you to clarify aspects of your response.

Legal framework for CCPs

1.33. The Bank supervises CCPs under a domestic statutory framework, primarily consisting of the Bank of England Act 1998 (the 1998 Act), FSMA (including as amended by FSMA 2023), and Assimilated Law (UK EMIR and related technical standards)^{footnote [11]} The UK regulatory framework aligns with internationally agreed principles, reflecting the high standards set by the Principles for Financial Market Infrastructures (PFMI) developed by the Committee on Payment and Settlement Systems (CPSS – subsequently renamed the Committee on Payments and Market Infrastructures) and the International Organization of Securities Commissions (IOSCO).

1.34. The changes to the statutory regulatory framework for UK FMI made by FSMA 2023, including the Bank’s new rule-making powers, represent a significant milestone in the evolution of the Bank’s regulatory regime. This model of regulation provides flexibility, enabling the Bank to respond quickly and update its rules as needed, whether to align with new international standards, adapt to market developments, or accommodate new business models. The Bank's primary objective when carrying out its FMI functions is to protect and enhance the stability of the UK financial system (the Financial Stability Objective). FSMA 2023 amended the 1998 Act to include a new secondary objective to, where possible, facilitate innovation in the provision of clearing services when advancing the primary financial stability objective (the Secondary Innovation Objective).^{footnote [12]}

1.35. In line with the additional responsibilities being granted to the Bank, and to support the Bank in exercising its new powers in a transparent and accountable manner, FSMA 2023 established the Financial Market Infrastructure Committee (FMIC). This replaced the previous non-statutory Financial Market Infrastructure Board. FMIC makes decisions in relation to FMI regulation and, through this, helps support the Bank’s statutory objectives.^{footnote [13]}

1.36. In carrying out its policymaking functions, the Bank is required to comply with several legal obligations. The Bank must have regard to specified regulatory principles set out in the Bank of England Act 1998 as amended by FSMA 2023, including an explanation of the ways in which having regard to these factors has affected the proposals^{footnote [14]} (Table A).

1.37. The Bank has a statutory duty to consult when making rules and publish a cost benefit analysis (CBA) alongside any proposed rules.^{footnote [15]} The CBA must include an analysis of the costs, together with an analysis of the benefits that would arise if the proposed rules were made and an estimate of those costs and benefits, where reasonably practicable to do so. The Bank is required to consult the Cost Benefit Analysis Panel (CBA Panel) on its CBA. The CBA Panel is an independent body, established under FSMA 2000 as a result of an amendment introduced by FSMA 2023, that provides advice to the Bank on cost benefit analyses. By providing independent assessments, the CBA Panel enhances transparency and accountability in the policymaking process.

1.38. In the exercise of its public functions, including its regulatory functions relating to the proposals in this paper, the Bank is also subject to a statutory duty set out in the Equality Act 2010 (Equality Act) to ‘have due regard’ to equality considerations, comprising the need to: (a) eliminate discrimination, harassment, victimisation and any other conduct that is prohibited by or under the Equality Act; (b) advance equality of opportunity between persons who share a relevant protected characteristic under the Equality Act and persons who do not share it; and (c) foster good relations between persons who share a relevant protected characteristic and persons who do not share it (the Public Sector Equality Duty).^{footnote [16]}

1.39. FSMA also requires the Bank to consider the effect of taking certain actions (including the making of rules) on deference decisions and to consult with HMT where it considers there is a material risk that the action would be incompatible with an international trade obligation.^{footnote [17]}

1.40. These obligations are reflected in this consultation paper in respect of the proposed rules for CCPs. Chapter 2 – Restatement of Assimilated Law explains how the Bank met these obligations for the areas where the Bank is proposing to restate UK EMIR rules without modifications. For areas where the Bank is proposing policy changes, these obligations are summarised in Chapter 3 – Areas of Policy Reform – Overview and set out in chapters covering specific areas.

The Bank’s rulebook for FMIs

1.41. The proposals in this CP will mean that the majority of requirements and expectations for CCPs would in future be contained within the Bank’s rulebook for FMIs, including associated statements of policy and supervisory statements, making it easier for CCPs to identify the regulatory requirements which apply to them.

1.42. Updated CCP-facing requirements will be set out in the FMI rulebook, which will be published on the Bank’s website once the consultation process is finalised. The rulebook will initially include Fundamental Rules for FMIs, CCP-facing rules and policy material (SoPs and SSs) and the Bank will look to incorporate further FMI requirements in future, particularly as other areas of EU Assimilated Law are revoked and replaced. The Fundamental Rules are intended to underpin the resilience of CCPs, CSDs and systemically important payment systems, through clearly and transparently establishing the high-level outcomes, consistent with the Bank’s objectives. They are consistent with, complement and underpin the relevant underlying detailed rules (including those proposed in this consultation paper) and international standards for FMIs. Fundamental Rules are available here.

1.43. The FMI rulebook will enhance transparency for FMIs through the increased accessibility offered by a single rulebook rather than the present case in which there are rules applicable to FMIs in Assimilated Law.

Chapter 2: Restatement of Assimilated Law

The Bank’s proposals

2.1. The government has set out its plan to revoke the EU Assimilated Law framework for CCPs so that the Bank can take on primary responsibility for setting regulatory requirements for these entities. This CP follows on from this and sets out Bank’s proposals to put this into effect. The Bank has considered Titles III to V of UK EMIR and related technical standards, as set out in Annex 1. Where UK EMIR and technical standards set out provisions that CCPs are required to comply with, the Bank is proposing to restate these into Bank rules without material changes to the policy substance, unless explicitly mentioned in this CP. The intention of these proposals is to maintain the current requirements on firms, as well as to preserve the Bank’s existing approach to how these requirements are interpreted and applied.^{footnote [19]} In instances where we propose to restate the existing provisions, we also provide an explanation of their policy intent within the chapters dedicated to specific policy areas. This aims to ensure that stakeholders have a clear understanding of the policy rationale behind the restatement of the existing rules.

2.2. This chapter analyses the impact of the Bank’s proposals for restating the majority of Assimilated Law provisions into its rules without material changes. This includes the analysis against the Bank’s objectives and ‘have regards’ as well as the costs and benefits of the proposals.

2.3. While this CP primarily focuses on the restatement of Assimilated Law without changing the policy intention, the Bank has identified some areas where policy changes are nevertheless warranted. The more material changes are summarised in Chapter 3 of this CP, with further details set out in the chapters covering specific topics. Other, less material, changes are also outlined in the chapters dedicated to the specific topics.

Non-material changes

2.4. The Bank has chosen to restate CCP-facing requirements in its rules with minor changes, including to use appropriate language to explain the rule and its intended effect in plain English, for example by using ‘must’ rather than ‘shall’. Rules have also been drafted to clarify obligations on CCPs, rather than using the passive tense or merely descriptive language. Where more than one obligation is imposed by a requirement, this has generally been broken down into separate rules.

2.5. The Bank is also proposing to replace references to ‘third country’ with ‘overseas’. However, references to ‘third-country CCPs’ have been updated to either ‘non-UK CCPs’ or ‘overseas CCPs’:

1. ‘Non-UK CCPs’ includes both recognised and unrecognised CCPs established outside the UK.
2. ‘Overseas CCPs’ specifically refers to recognised non-UK CCPs.

2.6. These updates aim to ensure greater clarity and consistency in terminology, aligning with broader regulatory language. Other clarificatory changes and minor amendments are discussed in chapters dedicated to specific areas.

2.7. UK EMIR also grants the Bank powers to develop technical standards for CCPs to specify further detail. Since the Bank has been given the rule-making powers over CCPs, provisions in UK EMIR empowering the Bank to develop technical standards are no longer necessary. To maintain clarity and avoid unnecessary duplication, these provisions will not be restated, ensuring consistency with the updated framework.

Approach to ESMA guidance and Bank’s supervisory statements

2.8. In the EU’s framework, requirements on CCPs are supplemented by guidelines issued by the European Securities and Markets Authority (ESMA). Following the UK’s withdrawal from the EU, the Bank set out its approach to EU guidelines in the statement of policy on the Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU .This sets out a supervisory expectation on CCPs to continue to make every effort to comply with EU guidelines applicable at the end of the EU withdrawal transition period to the extent that these remain relevant.^{footnote [20]} In relation to Q&As, the Statement of Policy noted that they have no binding force, but the Bank considers that Q&As may continue to be relevant, and that the Bank may have regard to these as appropriate. The Bank’s statement of policy also clarifies that the Bank does not expect CCPs to comply with amendments to ESMA Guidelines and Recommendations issued after 31 December 2020.

2.9. As part of the repeal and replace of UK EMIR, we want to minimise disruption to guidance and firms. ESMA policy material (guidelines, opinions and Q&A) on UK EMIR^{footnote [21]} is generally not restated as part of this CP. However, in some cases, the Bank proposes to incorporate specific elements of ESMA’s policy material into Bank rules or the Bank’s policy material at this stage, where the Bank considers doing so will enhance clarity and that the relevant guideline is appropriate to be restated as a binding rule or in the Bank’s policy. This is clearly signposted in the relevant chapters.

2.10. The Bank will review the remaining ESMA policy material at a later stage and may consult in future on any further changes. The Bank therefore expects CCPs to continue to consider the remaining ESMA guidance in line with its SoP above until further notice.

2.11. Since UK EMIR came into force, the Bank has published a number of supervisory statements to provide additional guidance on how CCPs can comply with UK EMIR requirements. As part of UK EMIR being revoked, supervisory statements need to be reviewed, and references updated to ensure alignment with Bank rules and other legislation. The Bank proposes to review supervisory statements in due course and may consult in future on any further changes. In the meantime, references in its supervisory statements to UK EMIR should be read as references to the relevant provisions in the Bank’s rules.

Permissions power

2.12. Under certain Articles of UK EMIR, CCPs must apply to the Bank for approvals or validations before undertaking certain actions. Subject to HMT making an SI which sets out the scope of the rules to which it applies, the Bank intends to use the permissions power under section 138BA of FSMA,^{footnote [22]} to replace certain approvals and validations in Titles III to V of UK EMIR. In practice, this generally means that a CCP will have to apply to the Bank for permission where it previously applied for an approval or validation in some areas. This CP therefore uses the language of ‘permissions’ rather than ‘approvals’ or ‘validations’ when discussing proposed new policy in these areas.

2.13. The Bank published its CP on its proposed approach to rule permissions and waivers. In particular, it proposes that subject-specific SoPs should contain the specific criteria which the Bank will consider in deciding whether to give permissions. The proposals in this CP are consistent with that approach. Draft Statements of Policy generally set out the information and evidence that the Bank will require in considering whether to give permissions, the criteria that it will follow, the timelines within which it will assess the completeness of an application and the process through which it will arrive at and communicate a decision (Annex 3).

2.14. While the Bank proposes replacing some approvals and validations with section 138BA permissions, there are instances where CCPs will no longer be required to apply for approval. These exceptions apply, for example, where existing provisions already establish clear and objective criteria for compliance. For example, CCPs currently seek approval for their estimated timeframe for winding down or restructuring their operations. Since the rules already provide for clear and objective criteria that CCPs must consider when making the estimate, the Bank considers that requiring permission would be disproportionate. Removing the requirement to seek permission will not preclude the Bank from engaging with the firm to ensure compliance with the requirements. The cases where the Bank proposes changing approvals to objective standards are clearly highlighted in the chapters covering specific areas.

2.15. To provide continuity, the Bank is proposing to carry over the existing authorisations and regulatory approvals granted under UK EMIR into the new regime. Consequently, the Bank does not intend to require firms to reapply for these permissions (Chapter 5).

2.16. The Bank has considered using section 138BA permissions in other contexts beyond giving effect to the current approvals and validation under UK EMIR and relevant technical standards. In particular, when restating Assimilated Law, some situations arise which currently set a requirement on CCPs and confer the discretion to further determine the requirements on the supervisory authority or other bodies. Under these situations, there are generally two approaches that the Bank could take when restating Assimilated Law:

1. Remove the reference which confers the discretion to further determine the requirement on the supervisory authority or other bodies. This approach would leave it to firms’ judgement whether they comply with the requirement.
2. Under the new section 138BA framework, pursue a permission approach to allow the Bank to assess whether or not a CCP complies with the requirement, and provide relevant criteria for giving the permission as part of a Bank SoP.

2.17. The general approach adopted in the proposals in this CP has been to use the first approach where the Bank considers that compliance with the requirement can be assessed objectively by CCPs. The second approach is not used in proposed Bank rules as it would add unnecessary regulatory burden for CCPs without delivering meaningful supervisory benefits. The Bank considers that the existing mechanisms already allow effective monitoring and engagement with CCPs, ensuring that financial stability risks are properly managed.

Accountability framework

2.18. The Bank has developed its proposals for restating Assimilated Law without material amendments in accordance with the relevant statutory obligations in the Bank of England Act 1998 and FSMA (as amended by FSMA 2023). This includes considering the proposals against the Bank’s objectives and the obligation to carry out a CBA. The analysis in this CP also explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals. A summary of the analysis is set out below and additional detail is set out in some of the individual chapters discussing the requirements.

Analysis against the Bank’s Financial Stability Objective

2.19. The Bank considers that the proposals for restating Assimilated Law without material amendment would continue to advance the Financial Stability Objective. Provisions in Titles III–V of UK EMIR establish a robust regulatory framework for CCPs and related oversight mechanisms, ensuring that risks are effectively managed. By restating the vast majority of these provisions without material amendment, the Bank’s proposals help maintain the resilience of CCPs and supports market confidence.

2.20. The Bank considers that, generally, current UK EMIR supports the advancement of the Financial Stability Objective through the implementation of international standards outlined within the PFMIs. The Bank has previously contributed to the development of UK EMIR. The proposals in this CP further contribute to the Financial Stability Objective by enhancing the resilience of UK CCPs and clarity of the regulatory framework. This is because the Bank considers that the proposed approach would enhance the clarity and coherence of the regulatory framework for CCPs due to the benefit of UK EMIR and relevant technical standards being restated in Bank’s rules and policy material.

2.21. The proposals for restating the Assimilated Law without material amendment would mean that the majority of requirements set out in Titles III-V of UK EMIR and the relevant technical standards would be contained within the Bank’s rules and associated policy material, making it easier for CCPs to understand the totality of the framework which will apply to them.

Analysis against the Bank’s Secondary Innovation Objective

2.22. The Bank considers that its proposals for restating the Assimilated Law without material amendment facilitates its Secondary Innovation Objective as they would improve the efficiency and economy of clearing services. CCPs operating within a well-established framework encourage greater participation in central clearing. As more participants opt for central clearing, they benefit from lower transaction costs driven by economies of scale, more efficient processes, and improved collateral management.

2.23. Transferring rules from primary legislation into the Bank rulebook allows the Bank to be flexible in adapting its regulatory framework as needed to keep up with innovation and react to innovations in the market.

2.24. The proposals for restating the Assimilated Law offer greater clarity to CCPs wishing to innovate as well as new entrants about what is expected. These proposals would also ensure that the regulatory requirements on CCPs are clear, facilitating new entrants and fostering innovation. This clarity is essential in reducing uncertainty and barriers for new firms, thereby encouraging new participation and innovative practices. By maintaining the established structure while providing greater clarity, the framework would become more accessible and easier to interpret. For new firms, a clear and coherent rule reduces uncertainty, ensuring they can better understand regulatory expectations without facing unnecessary complexities or ambiguities. This approach supports consistency and fosters a more predictable regulatory environment for new firms to operate in.

‘Have regards’ analysis

2.25. In developing the proposals to restate Assimilated Law, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’ obligations applying to the Bank. Below we outline our analysis of the ‘have regards’ which were deemed significant across the consultation paper for the parts of UK EMIR and technical standards that the Bank proposes to restate without material changes to the policy substance. The following factors, to which the Bank is required to have regard, were significant in the Bank’s analysis:

2.26. The need to use the Bank’s resources in the most efficient and economical way: The Bank considers that the proposals are in line with efficient use of the Bank’s resources. The proposals in this CP have generally been limited to a restatement of Assimilated Law because the Bank has judged this to be the most efficient and economical approach to ensure that CCPs are resilient and subject to strict regulatory standards. It would be disproportionate for the Bank to use its resources to carry out a more fundamental reframing of the regulatory regime for CCPs. The proposals aim to recreate the policy effect of the provisions in UK EMIR and relevant technical standards. These requirements generally have a track record of working well in practice of achieving regulatory aims. Once this material is incorporated into the Bank rulebook, the Bank will have the ability to make any further policy changes at a later date to ensure the Bank maintains a nimble and forward-looking rulebook. Restating some provisions as objective standards without the need for Bank approval, where appropriate, would enable the Bank to prioritise effectively and allocate resources where they are most needed.

2.27. The principle that the Bank should exercise its functions as transparently as possible: the restatement of Assimilated Law into the Bank rulebook is intended to give increased clarity to firms over the Bank’s intended approach and its expectations of firms, and to ensure that relevant policy requirements applying to CCPs are contained and are accessible within Bank rules and policy material. Where the Bank has made clarificatory changes to restated Assimilated Law these are further designed to increase the transparency of the rules.

2.28. The principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction: In recreating the CCP requirements from UK EMIR in the Bank rulebook we have considered that in the bulk of cases it is most proportionate to make no material change to the rules. As the existing regime is working well, it would be disproportionate to introduce changes that impose additional compliance or operational costs, unless a clear deficiency has been identified. The proposed changes are targeted and designed to ensure that regulatory adjustments remain proportionate and do not impose unnecessary burdens on CCPs. Restating certain provisions as objective standards without the need for Bank approval, where appropriate, would enhance proportionality by ensuring that supervisory processes are tailored to the level of risk involved.

2.29. The desirability of sustainable growth in the economy of the United Kingdom in the medium or long term: The proposals to restate UK EMIR requirements and introduce minor changes are designed to enhance the resilience and efficiency of the financial markets, thereby supporting sustainable growth. By refining existing regulatory frameworks, these measures aim to strengthen risk management framework for CCPs. Greater robustness in financial infrastructure reduces systemic vulnerabilities, fostering investor confidence and ensuring the stability of the UK’s financial sector.

2.30. The effects that the exercise of FMI functions will or may have on the financial stability of countries or territories (other than the United Kingdom) in which FMI entities are established or provide services: The Bank considers that restating the requirements outlined in this consultation will ensure the robust provision of CCP services which will benefit the financial stability of other countries where CCPs provide clearing services through enhanced resilience of the provision of such services. This have regard has been a central consideration given the global activities of the CCPs regulated by the Bank and the effect any domestic rule-making in the UK would have on the activities of CCPs in other countries.

2.31. Not to be determined by location (UK or elsewhere) of persons to whom FMI services are provided: The Bank considers that none of the policy proposals to restate Assimilated Law discriminate on the grounds of the location of persons whom FMI services related to this CP are provided. The proposals in this CP are relevant to all UK CCPs regardless of the location of persons using their services. The proposals relating to the overseas regime are relevant to all non-UK CCPs that are recognised by the Bank, regardless of the location of the non-UK CCP or the persons using their services.

2.32. Further analysis of the application of ‘have regards’ relating to the areas that are being restated with no or only minor changes is provided in the chapters addressing the relevant subject areas where relevant.

Equality and diversity

2.33. In developing its proposals, the Bank has had due regard to the equality objectives under section149 of the Equality Act 2010. The Bank considers that the proposals do not give rise to equality and diversity implications. Specifically, restating objective standards for participation requirements to CCPs would continue to promote equality by ensuring that all market participants are assessed against clear, consistent, and transparent criteria.

Cost benefit analysis

2.34. The Bank undertook CBA for its proposals for restating the Assimilated Law without material amendment in line with its approach set out in the Bank’s approach to cost benefit analysis and has consulted the CBA Panel (‘the Panel’) on the preparation of this CBA. In line with this approach the Bank has, in places, made use of a Standard Cost Model (SCM) to quantify direct costs to firms based on standardised industry data for staff costs and estimates of staff time needed to implement proposals.

Summary of benefits and costs

2.35. For areas where the Bank is proposing to restate Assimilated Law without changes to the policy substance or intention, the Bank considers that there would be limited additional cost for firms. Overall, relative to the baseline, the Bank believes that the compelling benefits of these proposals justify the associated costs.

2.36. The Bank considers that the costs to recognised systemic non-UK CCPs would align with the cost estimates for UK CCPs, as the Bank is proposing to restate the requirement for recognised systemic CCPs to comply with UK rules (as set out under rule 3.1 of the Overseas CCPs Part). Therefore, where the CBAs within this consultation paper refer to costs to CCPs, this should be taken as referring to recognised systemic non-UK CCPs as well as UK CCPs. It should be noted, however, that there is potential for the costs to recognised systemic non-UK CCPs to be lower on a case-by-case basis, should a comparable compliance permission be given to an individual CCP.

Benefits

2.37. When analysing the potential benefits of its proposals for restating the Assimilated Law without material amendment, the Bank considered the following types of benefits: (i) benefits to financial stability, particularly in times of stress, and (ii) benefits to FMIs and market participants.

2.38. Relative to the baseline, the proposals in this CP would lead to some improved efficiency and clarity for firms, through restating relevant parts of Assimilated Law in Bank rules and other policy materials, which will make it easier for CCPs to access and understand the rules that apply to them. This is relative to the current baseline in which requirements are split across UK EMIR, technical standards and Bank policy material.

2.39. Restating obligations into Bank rules will also enable the Bank to be more responsive and flexible in future. This flexibility is critical in addressing emerging risks that could threaten the financial system, ensuring that CCPs remain robust and resilient in the face of challenges. In turn, this would strengthen the overall stability of the financial system by swiftly reducing systemic risk and safeguarding market participants.

2.40. The Bank considers that the benefits of the proposed rules would outweigh the associated costs and bring a net benefit to the UK financial sector.

Costs

2.41. The Bank considered three types of potential cost: (i) direct costs to FMIs and to the Bank; (ii) indirect costs to FMIs and market participants; and (iii) costs to economic output. The Bank considered both one-off ‘implementation’ costs and any ongoing costs incurred to maintain compliance in future years.

2.42. The potential costs include compliance costs to CCPs directly arising from the proposals, reflecting the incremental changes that CCPs would not have undertaken in the absence of the regulation. We expect there will be one-off costs to CCPs to familiarise themselves with the regime, and assess their current practices in light of minor clarifications and non-material changes.

2.43. For areas where the Bank is proposing to restate Assimilated Law without changes to the policy substance, the main cost will be a direct cost to CCPs of familiarising themselves with the new format of the rules, and assessing whether they will require any changes in their processes. The Bank estimated that CCPs will face up to £80,000 in one-off implementation costs and the annual ongoing costs are estimated at £22,000 per CCP. In addition, CCPs would also face a notification cost when there is a change in control in a CCP but this cost is expected to arise infrequently.

2.44. Furthermore, the Bank estimated that the proposals to restate existing requirements for recognised non-systemic non-UK CCPs in Bank rules would result in a minimal, one-off cost for those CCPs to become familiar with the restated rules.

2.45. The Bank considers that the costs of these proposals to restate UK EMIR requirements are proportionate to the benefits, as outlined above in terms of advancing its primary and secondary objectives.

2.46. In line with statutory requirements, the Cost Benefit Analysis Panel was consulted on all policy proposals set out in this CP, an overview of which is set out in paragraphs 3.38–3.41.

Chapter 3: Areas of Policy Reform – Overview

3.1. The Bank has identified a small number of areas where policy changes may be warranted to enhance resilience of CCPs and improve the effectiveness and efficiency of the existing framework.

3.2. This chapter describes the material changes proposed in this CP and outlines the analysis against the Bank’s objectives and ‘have regards’ as well as costs and benefits of these changes. A more detailed and specific analysis is provided in relation to the same proposals in the relevant chapters of this CP.

3.3. There are seven areas where this CP proposes material changes to requirements on CCPs:

1. Transparency of margin requirements: implementing updated international guidance on margin, based on the final proposals published by BCBS-CPMI-IOSCO^{footnote [23]} which aim to enhance transparency and responsiveness of CCP margin calls. The proposed changes in relation to transparency of margin requirements are discussed in Chapter 14.
2. Increasing the likelihood of porting of client positions: requiring that the testing of default procedures covers all aspects, including porting procedures, changing the requirements in relation to the porting of positions in omnibus accounts so that client consent is received in advance for the porting to a pre-agreed clearing member and requiring CCPs to factor portability into clearing member default fund allocations. These changes are described in Chapters 15 and 16.
3. Introducing second skin in the game (SSITG): introducing a second tranche of CCP resources into the default waterfall, placed in line with the default fund. The second tranche is proposed to be the same size as the first tranche of skin in the game ie 25% of the CCP’s capital requirements. The proposed changes related to the default waterfall are set out in Chapter 17.
4. Enhancing the change in control framework: introducing a set of requirements for CCPs to help ensure the Bank is provided with comprehensive information on controllers in order to support well-informed decisions about controller suitability. The proposed changes related to the change in control framework is set out in Chapter 8.
5. Increasing clarity regarding liquidity risk controls: incorporating key elements of an ESMA opinion on CCP liquidity risk assessment^{footnote [24]} into Bank rules, to require: (i) CCPs to consider the different capacities to which they have exposures to clearing members; and (ii) default testing every pair of clearing members acting in all their different capacities vis-à-vis the CCP to ensure the CCP selects the pair that corresponds to the greatest exposure. The proposed changes relating to liquidity risk controls are described in Chapter 18.
6. Streamlining and increasing the clarity and proportionality of supervisory processes: (i) introducing a materiality threshold to identify a smaller number of material model changes and variations of recognition that require regulatory approval, and an expedited processes for non-material applications; (ii) publicly disclosing our performance with respect to those timelines; and (iii) clarifying application requirements for recognition, variation of recognition as well as material model changes via a statement of policy. This is discussed in Chapter 21.
7. Completing the framework for approval of interoperability links: bringing derivatives products into scope of rules governing the establishment of interoperable links between CCPs. The proposed changes related to interoperability are set out in Chapter 24.

Statutory objectives analysis

3.4. The Bank has developed these proposals in accordance with the relevant statutory obligations in the Bank of England Act 1998 and FSMA (as amended by FSMA 2023). This includes considering the proposals against the Bank’s Financial Stability Objective, the Secondary Innovation Objective, and the requirement to ‘have regard’ to certain policy considerations and to carry out a CBA.

3.5. The following paragraphs outline the impact of the Bank’s proposed material policy changes on its statutory objectives. More detailed analysis is contained in chapters 8, 14, 15–18, 21 and 24 of this CP.

Financial Stability Objective

3.6. For areas where the Bank proposes material changes, the Bank considers that the proposals set out in this CP would advance the Financial Stability Objective by enhancing the resilience of UK CCPs and clarity of the regulatory framework.

3.7. The Bank considers that the proposed changes would advance the Bank’s primary objective as they would enable CCPs to manage risks more effectively, and bring the UK regulatory framework in line with the recently updated international standards on margining practices:

1. The changes to margin requirements reflect the international work on increasing margin transparency and margin model responsiveness. Implementing these standards into the UK regulatory framework would enhance financial stability by ensuring greater transparency and predictability for market participants so that they are in a better position to predict and meet margin calls.
2. The measures focusing on increasing the likelihood of client position porting, and requiring an additional tranche of CCP resources in the default waterfall, and clarifications of liquidity risk management are intended to support effective CCP risk management in the scenario of a clearing member default. These measures would increase the financial resilience of CCPs and further align incentives. By promoting smoother transitions and continuity in the management of client positions, the proposed changes to porting requirements support the resilience of CCPs and the wider financial system.
3. Introducing requirements on CCPs to engage with regulators regarding a change in control and their ongoing shareholder structure will ensure the Bank receives timely and comprehensive information about new or prospective controllers of a CCP. This will enable the Bank to assess their suitability effectively, support the prudent oversight of CCPs and advancing the Bank’s financial stability objective.
4. The revised approach to reviews of model changes and extensions of authorisation would streamline and increase the transparency of the process, allowing CCPs to respond more readily to market developments and supporting a more effective allocation of supervisory resources. Standardised application templates and shorter review timelines would increase efficiency, while the new materiality threshold would focus regulatory review on significant changes. The updated approach would ensure that supervisory resources are allocated where they are most needed, aligning oversight efforts with the level of risk posed by model changes and authorisation extensions. By streamlining processes and increasing transparency, the Bank would be able to focus on significant developments that have the greatest impact on financial stability.
5. The increased role of the Bank in approving interoperability arrangements relating to derivatives markets would enable us to have greater understanding of risks associated with such arrangements, which would enhance financial stability.

Secondary Innovation Objective

3.8. For areas where the Bank proposes material changes, the Bank considers the policy proposals set out in this chapter would facilitate innovation by providing legal clarity and allowing CCPs to launch new services and implement changes to models more quickly:

1. Clarity about the model change review process as well as changes to shorten lead times will facilitate more accurate planning and timely implementation by CCPs of innovations to their clearing services.
2. Changes to increase CCP margin transparency promote innovation by enhancing CCPs’ accountability to their members and clients. This could encourage CCPs to enhance the design of their margin models with a particular focus on margin responsiveness.
3. Providing legal clarity about the regulatory process for derivatives interoperability arrangements supports firms that might wish to innovate by extending the range of products cleared via links.

‘Have regards’ analysis

3.9. The paragraphs below provide a high-level summary of the Bank’s analysis of the ‘have regards’ which were deemed significant for areas of material policy change. A more detailed analysis is set out in the chapters that cover specific policy areas. Where analysis has not been provided against a ‘have regard’, it is because the Bank has considered that ‘have regard’ and concluded that it is not a significant factor for these proposals:

3.10. The principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction: The Bank considers that this is a significant factor in the development of material policy change in this CP. The costs imposed on CCPs were considered to ensure that they are proportionate to the benefit of safeguarding financial stability, which is advanced by the proposals in this CP (as outlined in further detail in the CBA section).

3.11. Using the Bank’s resources in the most efficient and economical way: The Bank considers that the proposed material policy changes in this CP meet this ‘have regard’. In particular, the proposed approach to supervisory processes relating to variation of recognition, model reviews and change in control of CCPs seeks to use the Bank’s resources more efficiently.

3.12. The effects that the exercise of FMI functions will or may have on the financial stability of countries or territories (other than the United Kingdom) in which FMI entities are established or provide services: The Bank has taken into account the global nature of UK CCPs in its development of these rules. The Bank considers the rules outlined in this consultation will ensure the robust provision of CCP services which will benefit the financial stability of other countries where UK CCPs provide clearing services through enhanced resilience of the provision of such services. The Bank has paid particular attention to the PFMIs, the international standards for the regulation and supervision of CCPs when developing its policy. This have regard has been a central consideration given the global activities of the CCPs regulated by the Bank and the effect any domestic rule-making in the UK would have on the activities of CCPs in other countries.

3.13. Not to be determined by location (UK or elsewhere) of persons who FMI services are provided: The Bank considers that none of material policy changes proposed in this CP discriminate on the grounds of the location of persons whom FMI services related to this CP are provided. The proposals in this CP are relevant to all UK CCPs regardless of the location of persons using their services. The proposals relating the requirements for recognised non-UK firms are consistent with existing policy, and therefore do not result in any material changes for the firms or their participants, regardless of location.

HMT recommendations for FMIC

3.14. In the remit letter from the Chancellor of the Exchequer to the Bank on 1st July 2025, the Chancellor recommended that the FMIC should have regard – in the exercise of its FMI functions – to the government’s policy towards the financial services sector. As part of this the FMIC should have regard to:

1. The vital role UK FMIs play in protecting and upholding the financial stability of the UK, as well as other global markets.
2. The importance of actively facilitating innovation in FMIs so that incumbents and new entrants are able to innovate responsibly and scale up new technology and processes in the UK.
3. The role of proportionate regulation in facilitating growth.
4. Streamlining administrative burdens and processes for FMIs to offer new products and services where possible, while maintaining high regulatory standards.
5. Maintaining and enhancing the UK’s position as a world-leading global finance hub and demonstrating continued leadership in global regulatory fora.

3.15. We have had regard to the letter and the recommendations contained in it. We consider that our proposals in this consultation paper reflect an appropriate balance of these objectives and a more proportionate approach to regulation.

3.16. Taken as a whole, the proposals:

1. Simplify the administrative burden on firms by consolidating rules into a single rulebook. The transfer of regulation into Bank rules will give the Bank the flexibility to adapt rules to fit the requirements of firms as well as financial stability.
2. Form an adaptable single rulebook that will be able to change more quickly to respond to innovations among market participants, increasing the Bank’s ability to facilitate innovation in industry.
3. Include changes to standardise and streamline the processes around supervisory approvals for CCPs. This includes offering clearer guidelines and more transparent criteria for supervisory approvals to help improve the process and reduce delays.
4. Bring rules in line with developing international standards, allowing firms greater simplicity where they operate in multiple jurisdictions.
5. Benefit market participants by ensuring that CCPs give market participants confidence by setting requirements that incentivise CCPs to protect market participants and avoid unnecessary market stress, in particular through proposals covering areas such as margin, portability and second skin in the game.

3.17. While the Bank considers the package as a whole to contribute to financial stability, the Bank considers that the following proposals are particularly driven by the Bank’s regard to the role the UK plays in upholding the financial stability of the UK and global markets:

1. The proposals on portability are designed to reduce market stress that may be heightened by the rapid liquidation of unportable client positions, both in the UK and globally. Our portability proposals do not discriminate between UK and non-UK positions.
2. The proposals on margin requirements are calibrated to increase transparency with a focus on the responsiveness of margin, which will reduce liquidity risks in UK and non-UK markets during periods of market stress.

3.18. With regard to actively facilitating innovation in FMIs:

1. The proposals on supervisory processes shorten timelines for regulatory approvals or rejections of model changes and variations of recognition orders (extensions of authorisation) and make the criteria for materiality more transparent. This reduces regulatory uncertainty for CCPs, allowing them a quicker and safer process to roll out new innovations.

3.19. With regard to the role of proportional regulation in facilitating growth:

• 1. The proposals on interoperability arrangements will create a more certain legal basis for a broader use of these arrangements beyond those currently in scope of UK EMIR, allowing for greater market opportunities for UK firms in the long run.

3.20. With regard to the simplification of administrative processes:

1. The proposals on regulatory approvals are designed to create a simpler, quicker pathway for the approval or rejection of models and other CCP applications, reducing administrative complexity both for the Bank and for firms.
2. The proposals on sub-delegations aims to create objective standards in some cases which reduce the duplication of regulation and minimise the number of applications required by firms. This simplifies administrative burdens on both the Bank and firms.

3.21. With regard to the position of the UK as a global financial hub:

1. The proposals on interoperability arrangements will create a more certain legal basis for interoperability arrangements, allowing UK CCPs to give clients access to more products, increasing the attractiveness of UK CCPs and trading venues globally.
2. The proposals on second skin in the game provide a financial incentive for CCPs to manage the default waterfall in a prudent manner, increasing the attractiveness of UK CCPs to potential clearing members and clients.

Equality and diversity

3.22. In developing its proposals, the Bank has had due regard to the equality objectives under section 149 of the Equality Act 2010. The Bank considers that the proposals in this CP do not give rise to equality and diversity implications.

Cost benefit analysis

3.23. The Bank undertook CBA for each material policy proposal in line with its approach set out in the Bank’s approach to cost benefit analysis and has consulted the CBA Panel (‘the Panel’) on the preparation of this CBA. In addition to UK CCPs, the material policy proposals would also affect recognised systemic non-UK CCPs and therefore the same cost estimates would apply.

3.24. The Bank’s approach to CBA considered three main objectives:

1. Enhance the resilience of CCPs and allow them to better manage a clearing member default; reduce expected costs of crises through reducing their likelihood and severity.
2. Bring the UK regulatory framework in line with the recently updated international standards.
3. Facilitate innovation by streamlining regulatory processes to approve new products and changes to CCPs’ models.

3.25. The counterfactual would be to restate CCP-facing provisions in Bank rules without policy changes. This approach would be less likely to meet the objectives outlined above. This would also mean that the UK regulatory framework would fall short of international standards on margin requirements, as the proposals in this area flow from final proposals from BCBS-CPMI-IOSCO to enhance transparency in margin practices following the lessons learned from events such as the ‘dash for cash’.

3.26. Overall, relative to the baseline, the Bank believes that the compelling benefits of the policy changes justify the associated costs. Based on the analysis set out below, the Bank expects that the proposals would bring net financial stability benefits. The full cost benefit analysis is set out in chapters covering specific areas.

3.27. The CBA Panel provided feedback on the way the draft CBA analysed the proposals’ counterfactual; the average ongoing costs of some proposals; and the explanation of the proposals’ benefits. A summary of the Panel’s comments and how the Bank responded is set out in paragraphs 3.38–3.41.

Benefits

3.28. When analysing the potential benefits of proposed policies, the Bank considered the following types of benefits: (i) benefits to financial stability, particularly in times of stress; and (ii) benefits to market participants.

3.29. The Bank considers that the benefits of the proposed rules would outweigh the associated costs and bring a net benefit to the UK financial sector. This primarily reflects the benefits to financial stability through enhanced resilience of CCPs, better management of risk by CCPs, and oversight of that risk by the Bank:

1. The proposed changes to margin requirements would allow clearing members and clients to better understand and prepare for future liquidity needs and mitigate the need to liquidate assets potentially at a cost or below market value.
2. Introducing SSITG would strengthen CCPs’ incentives to minimise losses that need to be absorbed by their memberships when there is a default.
3. The proposed changes to porting requirements would increase the likelihood of successful porting of clients’ positions in the event of a clearing member’s default, by incentivising better preparation.
4. The proposed introduction of change in control requirements would allow the Bank to assess any risks to the CCP in a timely manner to ensure that any potential controller does not present a material risk to the resilience of a CCP. UK CCPs will benefit from a standardised and timely process where it is clear what information they are expected to provide to the Bank.
5. The proposed changes to interoperability arrangements would also result in an increased certainty for CCPs. Clarifying that all interoperability arrangements – regardless of asset class – should be subject to the same regulatory standards would provide the Bank with a stronger legal basis to ensure that each interoperability arrangement meets adequate requirements.
6. The Bank considers the proposals would also provide benefits through facilitating innovation in line with its Secondary Innovation Objective. Clarity about the model changes and authorisation review processes as well as changes to lead times will facilitate more accurate planning and timely implementation of innovations to clearing services.

Costs

3.30. The Bank considered three types of potential cost: (i) direct costs to FMIs and to the Bank; (ii) indirect costs to market participants, including clearing members and clients; and (iii) costs to economic output. The Bank considered both one-off ‘implementation’ costs and any ongoing costs incurred to maintain compliance in future years.

3.31. The potential costs to CCPs include compliance costs directly arising from the proposals, reflecting the incremental changes that CCPs would not have undertaken in the absence of the regulation. The Bank expects there will be one-off costs to CCPs to familiarise themselves with the regime, assess their current practices against new requirements and set up processes to comply with these requirements. There would also be ongoing annual costs to CCPs to comply with the requirements.

3.32. We estimate one-off implementation costs for CCPs to be £1,850,000 per CCP. The largest one-off cost would arise from updating the existing IT arrangements. This cost would be incurred to upgrade margin simulators where necessary, create a new model for allocating default fund contributions to members and update monitoring / default simulations to implement proposed changes to margin and porting requirements as well as the ongoing requirement to hold additional capital to comply with the SSITG requirement.

3.33. The Bank expects there would also be an annual ongoing (monitoring) cost per CCP, which is estimated at £200,000. The most direct ongoing cost that would arise from the proposed changes would be the additional capital that CCPs are expected to place in the default waterfall as their second SITG contribution. We estimate that the yearly incremental capital cost to comply with the SSITG proposal and therefore the opportunity cost, will be in the range of £300,000 to £1,227,500 depending on the scale of business.^{footnote [25]} Other ongoing costs that CCPs would face include costs to monitor compliance with the new policy.

3.34. It is likely that CCPs may already meet some of the requirements, due to the nature of their businesses, or due to preparations to meet international standards. Therefore, costs to CCPs may be significantly lower than those presented.

3.35. Indirect costs may occur once CCPs and clearing members have changed their behaviour in response to the intervention. For example, it is possible that CCPs may pass any additional costs through to clearing members via higher fees.

3.36. In terms of costs to the Bank, we estimate there will be costs of £170,000 to review the various applications that may be prompted by CCPs needing to apply for changes to their models, scope of recognition, or interoperability arrangements.

3.37. The Bank considers that the costs of these proposals are proportionate to the benefits, as outlined above in terms of advancing its primary and secondary objectives. The full cost benefit analysis is described in the relevant sections of this CP.

CBA Panel feedback

3.38. The Bank consulted the CBA Panel on its CBA for the proposals set out in this CP on 16 January 2025. The Panel provided feedback on the way the draft CBA addressed (i) the case for action; (ii) the methodology and evidence base; (iii) impact on CCPs and market participants; and (iv) the costs and benefits of the policy proposals.

3.39. The Panel provided advice on framing the behavioural incentives of some of the proposals, and illustrating the benefits of proposals through scenarios. They also noted the difficulty of precisely quantifying benefits, and supported the use of qualitative explanation of potential benefits. The Panel further advised that where the benefits could not be fully explained in quantitative terms, the analysis should provide suitable qualitative explanation.

3.40. The Panel also suggested that the benefits of the Second Skin in the Game proposals could be explained more fully by using scenarios of how this could affect clearing members behaviours in a default.

3.41. The Panel suggested that the CBA include further information on the impact of the proposals on different users of FMI services (ie small firms as well as the wider market). The Panel also provided a number of suggestions on presentational elements of the CBA.

Chapter 4: Glossary

4.1. This chapter sets out the Bank’s proposals to restate definitions set out in UK EMIR and CDR 153/2013 in the Glossary Part of the Bank rules, subject to changes set out in this CP, and add new definitions. The relevant Assimilated Law provisions are set out in Article 2 of UK EMIR and Article 1 of CDR 153/2013. The purpose of the Glossary Part of the Bank Rulebook is to ensure that there is legal clarity and consistency in the interpretation and application of the Bank Rulebook.

4.2. The Bank proposes to restate some definitions set out in Article 2 of UK EMIR and Article 1 of CDR 153/2013 in Bank rules, subject to modifications and additions outlined in this chapter as well as chapters covering specific topics. The proposed Glossary Part of the Bank’s rulebook is set out in Annex 2.

4.3. The proposed changes to the Glossary Part of the Bank Rulebook can be divided into the following three categories:

1. definitions from Article 2 of UK EMIR and Article 1 of CDR 153/2013;
2. definitions deriving from other legislation such as UK MiFIR or FSMA 2000 or 2023; and
3. new definitions.

4.4. The Fundamental Rules for Recognised Central Counterparties and Recognised Central Securities Depositories 2025 Instrument (Fundamental Rules Instrument) introduced the Bank Rulebook Glossary. This CP proposes amendments to some definitions introduced by the Fundamental Rules Instrument.

4.5. Table B outlines the categorisation of the proposed definitions.

4.6. The current definition of ‘trading venue’ in UK EMIR is linked to MiFIR and applies specifically to UK trading venues, including UK regulated markets, UK Multilateral Trading Facilities, or UK Organised Trading Facilities. However, the Bank considers that for the Interoperability, Management and Governance, and Business Continuity Parts of CCP rules (which is where this definition is used) a wider definition is more appropriate. To address this, the Bank is proposing to update the definition of ‘trading venue’ to ensure it also covers trading venues located outside the UK.

Bank’s objective analysis

4.7. The assessment of the impact of proposals relating to definitions on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

4.8. The assessment of the impact of the proposed changes to the definitions on the Bank’s objectives are set out in the chapters covering specific policy areas.

‘Have regards’ analysis

4.9. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to proposals to restate definitions with no policy changes are set out in Chapter 2 – Restatement of Assimilated Law.

4.10. Our analysis of the application of ‘have regards’ relating to the proposed changes to the definitions are set out in the chapters covering specific policy areas.

Cost benefit analysis

4.11. The costs and benefits of the proposals to restate the definitions for CCPs into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law. The costs and benefits of the Bank’s proposed changes are outlined in the chapters covering specific policy areas.

Question: Do you have any comments on the Bank’s proposed definitions?

Chapter 5: Interpretation and General Provisions

5.1. The Bank is introducing a set of interpretative and general requirements on CCPs in the Interpretation and General Provisions Part. These rules are set out in Annex 2. This set of provisions is intended to facilitate the clear interpretation and understanding of the rules that apply to a CCP in the Bank’s FMI Rulebook, including the rules set out in this CP. These rules clarify that italicised wording is subject to definition in the Glossary and how to interpret references to EU legislation.

5.2. The Interpretation and General Provisions Part of the CCP rules also proposes to introduce a set of emergency provisions to give CCPs clarity on how the CCP rules will apply in an emergency situation. The rules in this Part outline that an emergency is a scenario in which it is impractical for a CCP to comply with a rule, the scenario could not be avoided, and the circumstances are outside the control of the CCP. In such a situation, a CCP must notify the Bank of the emergency and the steps they are taking to deal with the consequences of the emergency. During this period a CCP will not be considered to be in contravention of the relevant rule(s) for as long as the consequences of the emergency continue and for so long as the CCP can demonstrate that it is taking all practicable steps to deal with those consequences, to comply with the rule, and to mitigate losses and potential losses.

5.3. The provisions in this part further propose to introduce a requirement that a CCP must not indicate or imply that it is recognised, regulated or otherwise supervised by the Bank in respect of business which it is not so recognised, regulated or otherwise supervised. This rule is designed to support transparency and prevent a CCP from stating or implying that they have regulatory approval for activities when they do not, which could be harmful to the CCPs’ participants.

5.4. For continuity, the Interpretation and General Provisions Part of the CCP rules proposes to carry over the existing authorisations and regulatory approvals granted under UK EMIR into the new regime. As such, a CCP would not be required to obtain a new permission under section 138BA for authorisations and regulatory approvals it has already obtained.

Bank’s objective analysis

5.5. The Bank believes that the proposals outlined within this part advances the Bank’s financial stability objective. The proposals will give CCPs greater confidence of how to interpret the rules made by the Bank, which should increase the likelihood of them correctly interpreting and abiding by the CCP rules. The Bank considers these rules to be consistent with the Bank’s secondary innovation objective, as they do not pose any barriers to innovation.

‘Have regards’ analysis

5.6. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. The Bank considers the following factors, to which the Bank is required to have regard, as significant in shaping this proposal:

1. Transparency: In setting out the interpretive provisions the Bank aims to increase confidence in understanding the intention of the CCP rules. This will increase the transparency through which the Bank places obligations on CCPs.
2. Proportionality: Carrying over the existing authorisations and regulatory approvals such that CCPs would not be required to obtain new permissions is proportionate and would mitigate regulatory burden for CCPs as the new regime is implemented. Additionally, these rules, in particular the emergency rules, aim to ensure that the requirements applied by the Bank to CCPs are proportionate. The emergency rules state that, in specific instances, CCPs will not be considered to be in breach of CCP rules. This is a proportionate approach to applying the CCP rules.

Cost benefit analysis

5.7. The Bank considers that costs associated with the introduction of these rules will be limited. The requirement for CCPs to notify the Bank during an emergency, should it be unable to meet any of the requirements outlined within the Bank rulebook, is the only material cost associated with the introduction of these rules. This cost only materialises in a limited set of circumstances. The cost incurred by the rule that requires that CCPs do not misleadingly claim recognition or supervision from the Bank for their activities is not considered material.

Chapter 6: Capital Requirements

6.1. This chapter sets out the Bank’s proposals to restate UK EMIR capital requirements for CCPs in the Capital Part of the CCP rules, with the relevant modifications described in this chapter. The relevant Assimilated Law provisions are set out in Article 16 of UK EMIR, Articles 1 to 5 of the CDR 152/2013 and Articles 274, 315 and 316 of the Capital Requirements Regulation (EU) 575/2013 (CRR 575/2013). The Capital Part for the CCP rules is set out in Annex 2.

6.2. Article 16 of UK EMIR outlines the regulatory capital requirements for CCPs. These regulations aim to ensure CCPs have sufficient capital ready and available to conduct an orderly winding down or a restructuring, and to cover losses which may arise from operational, legal, and business risks, as well as from credit, counterparty and market risks which are not already covered by the specific financial resources held by CCPs as per Articles 41 to 44 of UK EMIR. Articles 1–5 of the CDR 152/2013 and Articles 274, 315 and 316 of the CRR 575/2013 specify further detail on how CCPs should calculate their capital requirements.

6.3. The Bank proposes to restate paragraphs 1 and 2 of Article 16 of UK EMIR into its rules, as well as Articles 1 to 5 of CDR 152/2013 to ensure that CCPs’ capital requirements remain the same. This includes transposing references in CDR 152/2013 and Articles 274, 315 and 316 of CRR 575/2013 which will increase transparency and support readability. This approach does not take account of simplifications proposed under the PRA’s proposals to implement the Basel 3.1 standards for operational risk, which have been delayed until 1 January 2027. The Bank is not proposing to update the CCP capital requirements in Article 16 of UK EMIR or CRR 575/2013 at this time, but notes the ongoing CPMI-IOSCO work on FMIs’ management of General Business Risk, and plans to consider any reforms to the CCP capital regime in the round at a future date.

6.4. As part of the Bank’s proposals relating to the restatement of capital requirements for CCPs, the Bank proposes to make several clarificatory changes outlined in the following paragraphs.

6.5. The Bank proposes to introduce a new definition of ‘notification threshold’ to replace the existing notification threshold in Article 1 (3) of CDR 152/2013. A CCP is required to notify the Bank if its capital falls below this level. The Bank also proposes to update the definition of ‘capital’ in UK EMIR to refer to insolvency instead of bankruptcy or liquidation, bringing the definition into line with the approach to corporate insolvency in the UK.

6.6. The current framework requires a CCP to calculate its capital requirements for operational risk using either the Basic Indicator Approach or the Advanced Measurement Approach. The Bank proposes to remove the option to use the Advanced Measurement Approach for operational risk capital. The Bank does not consider this to be a material change as this approach has not been used by UK CCPs. Removing this option will support streamlining of the CCP rules and proportionality, as the Advanced Measurement Approach is expensive to calculate and less relevant for CCPs than other institutions given the relative lack of residual credit risk.

6.7. CDR 152/2013 requires CCPs to consider operational expenses in accordance with UK Companies Act accounting standards, UK adopted international accounting standards or the accounting standards of a third country under certain circumstances. The Bank proposes to remove the option for CCPs to consider their operational expenses in accordance with the accounting standards of a third country due to the comprehensive definition of UK-adopted international accounting standards that already exists. The Bank proposes to define UK-adopted international accounting standards and UK Companies Act accounting standards in the CCP rules and require a CCP to consider its operational expenses in accordance with either UK-adopted international accounting standards or UK Companies Act accounting standards. The Bank considers that none of the proposed changes amount to a change in the existing policy intent, and so the Bank does not expect these proposals to have a material impact on CCPs.

6.8. Capital requirements in Article 16 of UK EMIR contain an amount denominated in EUR. The Bank proposes to convert EUR-denominated amounts to GBP when restating paragraphs 1 and 2 of Article 16 in CCP rules (rule 2.1 of the Capital Part). The proposed approach uses the GBP/EUR exchange rate on 1 December 2012. The Bank considers that this is an appropriate reference date as it was the day EU EMIR came into force. This means the minimum amount of permanent and available capital a CCP must hold is £6.1 million. The conversion of EUR-denominated amounts to GBP goes beyond the restatement of Assimilated Law. However, the Bank does not expect this proposal to have a material impact on CCPs.

6.9. Recital 6 of CDR 152/2013 states that CCPs are not required to hold capital for trade exposures and default contributions that arise under an interoperability arrangement with another CCP. The Bank proposes to restate this provision as part of the restatement of Article 16 of UK EMIR to provide clarity for CCPs (rule 2.3 of the Capital Part).

6.10. The Bank has identified several requirements in Articles 2(2), 2(3) and 5 of CDR 152/2013 and Article 315 of CRR 575/2013 where CCPs are currently required to seek Bank approval of: (i) their estimates of the appropriate time spans for winding down or restructuring their activities in line with specified criteria; (ii) updated estimate time spans where there is a significant change in the assumptions underlying them; (iii) their estimates of the capital necessary to cover losses resulting from business risk; and (iv) any relevant adjustments to the Basic Indicator Approach. The Bank proposes to remove the requirement for CCPs to seek supervisory approval of these matters. However, to ensure the Bank can maintain sufficient supervisory oversight, the Bank is proposing to introduce notification provisions which require a CCP to immediately notify the Bank in the above circumstances and where there are material changes to certain notifications, and of its capital requirements for operational risk calculated under the Basic Indicator Approach(rules 4.3, 6.4, 6.6 and 9.4 of the Capital Part). This proposal seeks to enhance regulatory efficiency while maintaining effective oversight, ensuring the Bank stays informed of changes to the CCP’s capital calculations.

Bank’s objective analysis

6.11. The assessment of the impact of proposals relating to capital requirements on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

6.12. Article 16 of UK EMIR advances the Bank’s financial stability objective by ensuring that CCPs have proportionate financial resources ready and available in the event of a non-default loss, which excludes those resources specified in Article 41 (Margin requirements), Article 42 (Default fund), Article 43 (Other financial resources), and Article 44 (Liquidity risk controls) of UK EMIR. These resources allow for the continuity of critical clearing services provided by the CCP and mitigate the risks of a disruption at the CCP which could lead to the crystallisation of various financial stability risks.

6.13. The Bank considers that its proposal to convert EUR-denominated amounts in Article 16 of UK EMIR to GBP would lead to a simpler and clearer application of the prudential framework for CCPs, supporting its financial stability objective. Replacing the requirements for CCPs to seek the Bank’s approval of time estimates for winding down or restructuring their activities and the capital necessary to cover losses arising from business risk with a notification requirement, supplemented by an objective standard for material changes would support the Bank’s financial stability objective by simplifying the existing rules and providing a clear standard for CCPs. The minor changes proposed, including removing the option for CCPs to use the Advanced Measurement Approach for operational risk capital and removing the option to consider their operational expenses in accordance with the accounting standards of a third country, support the Bank’s financial stability objective by providing clarity to CCPs and removing superfluous requirements.

‘Have regards’ analysis

6.14. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to capital requirements proposals outlined in this chapter is set out in Chapter 2 – Restatement of Assimilated Law.

6.15. In addition, the Bank considers the following factors, to which the Bank is required to have regard, as significant in shaping this proposal:

1. Transparency: The Bank considers that its proposal to convert EUR-denominated amounts in Article 16 to GBP would lead to a simpler application of the prudential framework for CCPs by removing scope for changes in the requirements applicable to them that stem from variations in the GBP/EUR exchange rate. Removing the option for CCPs to consider their operational expenses in accordance with the accounting standards of a third country would simplify CCP rules and support transparency.
2. Proportionality: The Bank considers that converting regulatory approvals into a notification requirement and an objective standard for material changes would be a more proportionate mechanism to permit firms to meet the existing capital requirements. As the Advanced Measurement Approach for operational risk capital has not been used in the UK to date, the Bank considers that it would be more proportionate to remove it as an option.
3. Using the Bank’s resources in the most efficient and economical way: The Bank considers that the proposed approaches to restatement of the CDR 152/2013 articles relating to capital requirements would lead to an efficient and economical use of its resources. CCPs would not be required to seek the Bank’s approval when estimating capital necessary to cover losses arising from business risk and time spans for winding down or restructuring their activities for the purposes of the capital requirements, thereby freeing up supervisory resources to consider other matters.

Cost benefit analysis

6.16. The costs and benefits of the proposals to restate the exiting capital requirements for CCPs into CCP rules are set out in Chapter 2 – Restatement of Assimilated Law. The costs and benefits of the Bank’s proposed minor changes are outlined below.

6.17. The Bank considers that its proposal to convert EUR-denominated amounts in Article 16 of UK EMIR to GBP when restating paragraphs 1 and 2 within CCP rules would provide greater certainty to CCPs by removing the potential effects of exchange rate fluctuations, thereby advancing the Bank’s primary objective of promoting financial stability. For example, the proposal would ensure that exchange rate fluctuations observed over time would not affect the amount of capital which CCPs must hold.

6.18. The proposal to convert a requirement for CCPs to seek the Bank’s approval of capital necessary to cover losses and time spans for winding down or restructuring their activities for the purpose of the capital requirements into a notification requirement and an objective standard for material changes would reduce compliance costs for CCPs and be less costly for the Bank to implement.

6.19. The proposal to remove the option for CCPs to use the Advanced Measurement Approach to calculate operational risk capital and the proposal to remove the option for CCPs to consider their operational expenses in accordance with the accounting standards of a third country would benefit CCPs by simplifying CCP rules and removing superfluous options.

Question: Do you have any comments on the Bank’s proposed restatement of capital requirements?

Chapter 7: Management and Governance

7.1. This chapter sets out the Bank’s proposals to restate in the Management and Governance Part of the CCP rules, with minor modifications, UK EMIR requirements related to management and governance set out in Articles 26, 27, 28, 31 and 33 of UK EMIR and Articles 3 to 8, 10 and 11 of CDR 153/2013 the substance of which is described below. The Management and Governance Part for the CCP rules is set out in Annex 2. Minor modifications include a small change to simplify the definition of ‘board’ as the UK does not operate a two-tiered board structure.

7.2. Article 26 of UK EMIR sets out general organisational requirements for CCPs, focusing on governance, decision-making processes, and internal controls to ensure robust governance frameworks. CDR 153/2013 expands on these obligations, requiring CCPs to establish an appropriate organisational structure with clear separations of business functions and reporting lines where necessary. CDR 153/2013 further outlines requirements for risk management, internal control mechanisms, and compliance function, as well as areas such as remuneration policies, governance arrangements, and internal audit functions. Although these requirements will generally be restated in the Management and Governance Part of the CCP rules, the Bank notes that specific elements of Article 4 CDR 153/2013 relating to liquidity will be restated within the Liquidity Risk Controls Part of the CCP rules.

7.3. Article 27 of UK EMIR outlines specific obligations linked to senior management and the board, including obligations concerning the composition of the board. CCPs are required to have reputable senior management and a board with sufficient expertise, with roles and responsibilities being clearly defined. These rules will be recreated within the Senior Management and the Board Chapter of the Management and Governance Part of the CCP rulebook. The Bank is also proposing to include part of Article 31(1) within this section as rule 12.7 of the Management and Governance Part this rule outlines that a CCP must notify the Bank of any changes to its management.

7.4. The majority of the provisions outlined within Article 31 of UK EMIR are not obligations on CCPs and therefore these will not be restated within Bank rules. The Bank notes that only a portion of Article 31(1) is recreated in rule 12.7 of the Management and Governance Part as part of this provision places obligations on the Bank to take appropriate measures, which may include removal from the board at a CCP where the conduct of a member of the board is likely to be prejudicial to the sound and prudent management of the CCP. HMT proposes to restate the part of Article 31(1) which grants the Bank power to remove members of the Board, as outlined within their Policy Note.

7.5. Article 28 of UK EMIR requires CCPs to establish a risk committee with representatives from clearing members, independent board members, and clients, and sets our obligations for CCPs relating to the risk committee and governance. These rules will be recreated within the Management and Governance part of the CCP rules.

7.6. Article 33 of UK EMIR outlines requirements for CCPs governing conflicts of interest. These have been included within the Management and Governance Part of the CCP rules. These rules are designed to ensure that CCPs have effective written arrangements to manage any conflicts of interest that may arise through managers, employees or those with direct and indirect control.

7.7. The Bank proposes to restate these provisions in CCP rules, subject to changes set out below.

7.8. Recitals 66 and 67 UK EMIR outlines text of relevance to the Risk Management and Internal Control Mechanisms Chapter of the Management and Governance Part of the CCP rules, formerly CDR 153/2013 Article 4. The Bank is therefore proposing to include this text within the Management and Governance Part of the rules specifically in rules 4.1(3) and 4.3. These proposed requirements provide that when defining a sound risk-management framework, a CCP must take into account the potential risk to and economic impact on the clearing members and their client. They further outline that a CCP will have to ensure that its risk-management strategies are sufficiently sound so as to avoid risks to the taxpayer.

7.9. Article 10(1) of CDR 153/2013 requires CCPs to obtain the Bank’s agreement on whether certain information could put at risk business secrets or the CCP’s safety and soundness. The Bank proposes to replace the existing approval process with permissions given under section 138BA of FSMA in rule 9.2 of the Management and Governance Part. This will allow CCPs to apply for a permission to modify or not disclose information that may put at risk business secrets or the safety and soundness of the CCP in order to mitigate such risks. The accompanying Statement of Policy – The Bank of England’s approach to disclosure permissions (Annex 3, herein referred to as the ‘Disclosure Permission SoP’), which is being consulted on as part of this CP, sets out the process for applying for this permission including the criteria that must be met, the supporting evidence to be submitted and assessment of this by the Bank.

Bank’s objective analysis

7.10. The assessment of the impact of proposals relating to Management and Governance on the Bank’s primary and secondary objectives is covered by the analysis set out in paragraphs of Chapter 2 – Restatement of Assimilated Law.

7.11. Specifically, these rules promote high standards of governance, support good standards of fitness and propriety of the CCP’s leadership, robust internal challenge and appropriate incentives. This encourages prudent and effective management of the CCP, which is necessary for effective risk management. This in turn promotes improved resilience of the CCP. By ensuring independent challenge and appropriate engagement with clients/clearing members, these rules help to ensure that CCPs manage systemic risk effectively, contributing to the safe and effective provision of clearing services which promotes financial stability.

‘Have regards’ analysis

7.12. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to Management and Governance proposals is set out in Chapter 2 – Restatement of Assimilated Law. In addition, the Bank considers the following factors, to which the Bank is required to have regard, as significant in shaping this proposal:

1. Proportionality: These rules set out governance requirements at a reasonably high level and therefore allow for some flexibility in implementation which enables the rules to be proportionate to the burden which they impose.
2. Differences in the nature and objectives of businesses: The rules drafted under this part are applicable to CCPs that have different business structures, they set out high level and general requirements on management and governance without being overly prescriptive as to how those are applied.
3. Facilitating fair and reasonable access to FMI services: These rules support clearing member and client participation and independent governance of CCPs and therefore promote conditions that can contribute to facilitating fair and reasonable access to FMI services.

Cost benefit analysis

7.13. The costs and benefits of the proposals to restate existing Management and Governance requirements for CCPs into CCP rules are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed rules related to Management and Governance?

Chapter 8: Change in Control

8.1. Article 31 of UK EMIR requires shareholders or prospective shareholders of UK CCPs to inform the Bank of their intention to buy or sell shares giving rise to significant holdings in CCPs, which then allows the Bank to assess the suitability and financial soundness of the acquirer. The threshold for a significant holding begins at 10% of share ownership or voting rights, and is further triggered through 20%, 30% and 50%.

8.2. The requirement to notify the Bank of a change in control applies to the shareholders of CCPs. As these rules place obligations on shareholders and not the CCPs themselves, it is beyond Bank’s rule-making power to replicate these obligations in its rules. HMT is proposing to restate the provisions that apply to shareholders or prospective shareholders in UK EMIR in legislation.

8.3. At present there is no requirement for CCPs to notify the Bank when they become aware of a change in their shareholder structure. There is also currently no standardised notification or information sharing process between the Bank and a CCP for a change in control, which can lead to inefficiencies in information exchange between CCPs and Bank supervision teams. The Bank is therefore proposing to create rules that place obligations on the CCPs themselves to notify the Bank about a change in control. The Bank is also proposing to introduce an ongoing requirement for CCPs to inform the Bank of their shareholder structure. The Change in Control Part for the CCP rules is set out in Annex 2.

8.4. The Bank’s proposed requirements for CCPs would include providing detailed information about a change in control, including the names of controllers and descriptions of the event (ie, acquiring, increasing or reducing control). CCPs would be required to keep the Bank informed of any changes or inaccuracies in the information provided. They would also be subject to ongoing notification and monitoring requirements, including an obligation to notify the Bank if they become aware of certain matters relating to the suitability of their controllers. This set of ongoing requirements would include an annual controllers’ report that the CCP must submit to the Bank. The proposed form of the annual controllers report is set out in an Annex to the Change in Control Part. The introduction of these requirements will allow the Bank to standardise the information that CCPs need to share during a change in control. This standardisation will give CCPs clarity of the information the Bank requires and will therefore reduce the number of supervisory interactions between the Bank and CCPs when gathering this information, providing efficiency benefits for both CCPs and the Bank. Alongside these proposals the Bank is introducing specific definitions for ‘reducing control’ and ‘increasing control’. These definitions are outlined within the Glossary Part of the CCP rules. The definitions of ‘increasing control’ and ‘reducing control’ have the meaning given in 301S and 301T of FSMA 2000 respectively, as proposed by HMT’s SI. The proposed FSMA 301S and 301T outlines that ‘increasing control’ and ‘reducing control’ relate to situations in which A’s ownership of shares or voting power in B increases or reduces through a threshold of 20%, 30% or 50% or in instances where A becomes or ceases to be a parent undertaking of B. The term ‘qualifying holding’ has been amended for clarity and accuracy.

Bank’s objective analysis

8.5. The assessment of the impact of the proposal relating to change in control is set out in paragraphs below.

8.6. Introducing the notification requirements for CCPs in the event of a change in control would help to ensure the Bank is provided with comprehensive information on controllers and would support well-informed decisions about their suitability, thereby contributing to the Bank’s objective of promoting financial stability. The proposal to standardise the notification process for CCPs would streamline processes for both CCPs and the Bank by establishing standardised requirements.

8.7. The introduction of relevant definitions such as ‘increasing control’ and ‘reducing control’ provides clarity of when the Bank would expect notification requirements to be triggered and therefore contributes towards the effective implementation of change in controls rules. This will ensure that the Bank is provided with comprehensive information on controllers and would support well-informed decisions about their suitability, thereby contributing to the Bank’s objective of promoting financial stability.

8.8. Restatement of the existing notification requirements and creating a new notification obligation for CCPs would continue to facilitate innovation by ensuring that the new shareholders are suitable and their business plan for the target CCP will not have a negative impact on the quality of clearing services provided by the CCP.

‘Have regards’ analysis

8.9.The ‘have regards’ analysis of proposals relating to change in control are set out below.

1. Proportionality: The proposal to require CCPs to notify the Bank of change in control is proportionate to the risks these proposals pose to UK financial stability. The number of previous incidents of changes in control at UK CCPs suggests that the notification requirements introduced when there is a change in control will be infrequent. Any ongoing requirement for CCPs to be aware of developments in their ownership structure should not produce significant costs beyond BAU activities already carried out by CCPs.
2. Transparency: Through the creation of standardised change in control processes for CCPs the information the Bank expects to receive from CCPs in these instances will be made clear and transparent.
3. Using the Bank’s resources in the most efficient and economical way: The Bank considers that the notification proposals are in line with efficient use of Bank’s resources. By placing notification requirements on CCPs in relation to change in control the Bank will be able to use its resources more efficiently in future instances of change in control due to standardisation of the information the Bank expects to receive from CCPs leading to less time spent by supervisions teams gathering information from CCPs.

Cost benefit analysis

8.10. The costs and benefits of the Bank’s proposal to introduce requirements when there is a change in control are outlined below.

Benefits

8.11. The Bank considers that adding a notification requirement for potential changes in control benefits UK financial stability by giving the Bank advance notice of changes in control, allowing more time to foresee risks and mitigate them.

8.12. The Bank having information that allows it to assess any risks to the CCP in a change in control scenario promotes the ability for the Bank to assess at an early stage whether a potential controller at a CCP represents any material risk to the resilience of that CCP. By ensuring that the CCPs regulated by the Bank are resilient the Bank contributes toward its financial stability objective by ensuring that CCPs that provide clearing services in the UK are resilient.

8.13. The proposed rules further ensure that the Bank gains relevant information efficiently and effectively during a change in control. The introduction of these rules ensure that the Bank will receive information from the regulated CCP as well as information from prospective controllers. A requirement on CCPs to keep the Bank informed of the accuracy of information around an acquisition further acts as an appropriate check and balance both during the change in control process and the ongoing notification requirements ensure that on an ongoing basis the Bank is made aware of any material impacts to the ownership structure of CCPs. The inclusion of a requirement for CCPs to submit an annual controller report will further increase the Bank’s awareness.

8.14. UK CCPs also benefit from making compliance less costly by standardising, and making clear to CCPs, the information they are required to provide. By making clear in prescriptive rules the requirements on CCPs there will be an efficient allocation of resources and will minimise further requests for information from Bank supervision which can lead to inefficient information sharing.

Costs

8.15. The Bank have considered three types of potential cost: (i) direct costs to FMIs and to the Bank; (ii) indirect costs to FMIs and market participants; and (iii) costs to economic output. We have estimated costs quantitatively where we can based on the Standard Cost Model.

8.16. The cost of introducing change in control notification requirements will be ongoing but would arise infrequently. The annual controller report submitted by CCPs will be an annual cost. Given the infrequency of either changes in control or in the status of existing controllers, and the low cost to notifying supervisors, we estimate that the notification cost would be one compliance professional person-day per year, estimated at £355 per UK CCP per year in the standard cost model. There will be a cost to familiarisation and to set up a regular process for notifying the Bank, which we estimate as two, non-recurring compliance professional person-days, also estimated at £710 per CCP in the standard cost model. This gives an overall estimated cost of £1065 per UK CCP in the first year and then £355 per UK CCP for future years.

8.17. While these new rules will mandate an ongoing requirement for CCPs to remain aware of their current shareholder structure, the Bank expects an increase cost to be minimal as the proposed rules broadly reflect existing practice – UK CCPs already take an active approach and notify the Bank of a change in control. However, the Bank does expect that there will be a familiarisation cost for CCPs in the first instance to ensure compliance with these rules, even in instances where this reflects CCPs current practices.

8.18. The Bank deems this proportionate to the financial stability benefits of the Bank gaining as much information, as efficiently as possible, to ensure that proposed shareholders of CCPs are suitable.

8.19. The Bank does not expect other costs to arise. We do not expect any costs for the Bank given receipt of notification will be handled as part of ongoing supervisory workload for a change in control.

Question: Do you have any comments on the Bank’s proposed rules related to Change in Control?

Chapter 9: Record Keeping

9.1. This chapter sets out the Bank’s proposals to restate UK EMIR record keeping requirements, subject to minor amendments described in this chapter, in the Record Keeping Part of the CCP rules. The relevant Assimilated Law provisions are in Article 29 of UK EMIR and Articles 12 to 16 of CDR 153/2013 as well as Commission Implementing Regulation (EU) 1249/2012 (CIR 1249/2012). The Record Keeping Part for the CCP rules is set out in Annex 2.

9.2. Article 29(1) to (3) of UK EMIR outlines requirements that are designed to ensure that CCPs keep adequate records. CCPs must maintain records on their services and activity, and on the contracts they process, for a period of 10 years and make such records available to the Bank upon request.

9.3. Articles 12 of CDR 153/2013 outlines general obligations for CCPs on how this information should be recorded and the timelines and processes for making it available. Article 13 then provides specific detail of the transaction records CCPs must maintain. Article 14 does the same for position records, Article 15 for business records and Article 16 for data reported to trade repositories.

9.4. CIR 1249/2012 specifies in Article 1 the format of the records required by Articles 20 to 22 CDR 153/2013. This reference is currently inaccurate and the reference should be with regard to Articles 13 to 15 CDR 153/2013. CIR 1249/2012 also annexes a set of standardised tables and templates for the disclosure of information to the Bank and other regulators.

9.5. The Bank proposes to restate Article 29(1) to (3) of UK EMIR, Articles 12 to 16 of CDR 153/2013 and Article 1 of CIR 1249/2013 in the Record Keeping Part of the Bank rules, subject to the amendments described in this chapter.

9.6. There are a small number of areas contained within the Record Keeping Part where the Bank has chosen to restate the rules with minor changes outlined in the following paragraphs.

9.7. In various instances throughout the Record Keeping Part 2.3, 2.5, 2.6, 2.10 consistent with the approach described in paragraph 2.16(i), the Bank proposes to clarify that certain obligations apply to CCPs on an ongoing basis rather than at discretion of the Bank.

9.8. The Bank proposes to move the standardised tables and templates annexed to CIR 1249/2012 into CCP rules, for consistency purposes. There are areas where appropriate changes have been made, such as in aligning certain terms with definitions provided for in the Glossary Part of the CCP rules and updating various cross-references to ensure the tables are fit for use in line with the rules outlined within the new proposed set of rules in the Record Keeping Part. These changes are not designed to alter the policy effect of these tables. Changes have also included the introduction of defined terms ‘business day’ to reflect the global nature of UK CCPs and the products they clear.

Bank’s objective analysis

9.9. The assessment of the impact of proposals relating to record keeping on the Bank’s primary and secondary objectives is covered by the analysis set out in paragraphs of Chapter 2 – Restatement of Assimilated Law. The clarificatory changes outlined within this part of the CCP rules are designed to advance financial stability through ensuring the record keeping requirements that apply to CCPs are clear and transparent.

‘Have regards’ analysis

9.10. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to record keeping requirements is set out in Chapter 2 – Restatement of Assimilated Law. Where the Bank has made clarifications to the ongoing nature of the requirements in the Record Keeping Part the Bank has further considered the below have regard as material:

1. Transparency: Through the clarification that the record keeping rules applying on an ongoing basis the purpose of these rules will be made clearer and more transparent.

Cost benefit analysis

9.11. The costs and benefits of the proposals to restate existing record keeping requirements for CCPs with changes described in this chapter are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of requirements relating to Record Keeping?

Chapter 10: Business Continuity

10.1. This chapter sets out the Bank’s proposals to restate UK EMIR business continuity requirements in Bank rules, with modifications described in this chapter. The relevant material within Assimilated Law is set out in Article 34 of UK EMIR and Articles 17 to 23 of CDR 153/2013.

10.2. Article 34 of UK EMIR outlines requirements for a CCP’s business continuity policy. A CCP is required to establish and maintain an adequate business continuity policy and disaster recovery plan, which should at least allow for the recovery of all transactions at the time of disruption. In doing this, it must establish and maintain an adequate procedure to ensure the timely and orderly settlement or transfer of assets and positions of clients and clearing members in the event of a withdrawal of authorisation.

10.3. CDR 153/2013 Articles 17 to 23 specify the minimum content of and requirements for the business continuity policy and disaster recovery plan. Article 17 outlines the content of the business continuity policy and disaster recovery plan, and notes that CCPs are required to be subject to independent reviews which are reported to the board. Article 18 requires CCPs to conduct a business impact analysis to identify critical business functions. Article 19 requires CCPs to have in place arrangements to ensure continuity of their critical business functions in disaster scenarios, and Article 20 requires them to test and monitor their business continuity policy and disaster recovery plans to ensure they achieve their stated objectives. Articles 21 to 23 cover requirements to review and update the business continuity policy, establish and maintain a crisis management function and have a communication plan for use in a crisis.

10.4. These provisions aim to support the operational resilience of CCPs, both to minimise the likelihood of operational disruption occurring and mitigating and recovering from such disruption when it occurs. This seeks to ensure that any disruption to the provision of a CCPs’ critical clearing services is minimised, reducing the impact on the CCPs’ participants and their clients and the broader financial system.

10.5. The Bank proposes to restate these provisions in Bank rules with changes outlined in the following paragraphs. This would ensure that CCPs will continue to be subject to provisions on business continuity as outlined in the current UK EMIR and CDR 153/2013. The proposed Business Continuity Part for the CCP rules is set out in Annex 2.

10.6. Article 21(3) of CDR 153/2013 requires CCPs to take into account recommendations of the Bank’s reviews when updating the business continuity policy and disaster recovery plans. The Bank proposes to delete this requirement as it would not be consistent with the scheme of regulation under FSMA for the Bank’s own rules to grant it the power to require its recommendations to be taken into account. However, the Bank has the right to exercise its statutory powers in order to enforce its supervisory recommendations in this area in the same way as in relation to other areas of a CCP’s operations. In addition, the Bank proposes that the requirement for CCPs to take into consideration the recommendations of any independent and other reviews will remain in rule 7.3 of the Business Continuity Part.

10.7. The Bank proposes that the requirement for CCPs to take the impact of outsourcing of ‘critical functions or services’ into account in business continuity planning (currently in CDR 153/2013 Article 17(3)) be amended in rule 3.2 (3)(b) of the Business Continuity Part of the CCP rules to refer to ‘critical business functions and related systems’. This is to achieve consistency with the wording of the business continuity requirements.

10.8. The Bank also proposes to consolidate certain requirements currently contained in separate paragraphs of CDR 153/2013 Article 17 into single paragraphs covering discrete subject matters. As a result, the Bank has added into rule 3.1 of the Business Continuity Part relating to the content of the business continuity policy and disaster recovery plan the requirement that this plan contains clearly defined arrangements to ensure minimum service level provision in extreme scenarios, and added to rule 3.2 on the business continuity policy more broadly the requirements around what this policy takes into account, the maximum acceptable time for which functions and systems may be unusable and completion of end of day procedures and payments.

10.9. The Bank also proposes to consolidate certain requirements currently contained in CDR 153/2013 Article 18, by adding into rule 4.4 of the Business Continuity Part relating to business impact and scenario analysis the requirement that CCPs take into account all relevant developments. These changes are intended to make it more straightforward to understand related requirements. The Bank proposes that the requirement for a CCP to have a communication plan in the event of a crisis that are currently contained in CDR 153/2013 Article 23 be moved into rule 8.4(2) of the Business Continuity Part. This is because this provision is clearer if set alongside other requirements relating to the role of a CCP’s crisis management function in setting out communication procedures in the event of a crisis.

10.10. The Bank proposes to clarify the matters to be reported to the board of a CCP, which are currently contained in CDR 153/2013 Article 23. This is by referring in rule 9.1 of the Business Continuity Part, which relates to reporting to the board, to business impact analysis and scenario–based risk analysis rather than scenario analysis and risk analysis, consistent with the wording on business impact analysis requirements.

10.11. The Bank proposes that the requirements for a CCP to maintain a recovery plan allowing for the recovery of all transactions, allowing the CCP to operate with certainty, and complete settlement on the scheduled date that are currently in UK EMIR Article 34(1) be moved to rule 5.1(2)(b) of the Business Continuity Part, which relates to disaster recovery. This is because the context for this provision is clearer if set alongside other requirements relating to the content of a CCP’s disaster recovery plan.

10.12. The Bank does not propose to restate UK EMIR Article 34(3) in Bank rules, as this provision is a mandate for the development of technical standards that have already been developed. Instead, these standards are proposed to be restated in Bank rules.

10.13. The Bank’s Supervisory Statement on Operational Resilience for CCPs further explains the Bank’s supervisory approach to business continuity, grounded in the requirements set out in these provisions. This is particularly in relation to the requirement that CCPs plan for disruption, establish their impact tolerance, and test their ability to remain within it. This Supervisory Statement will remain unchanged until it is reviewed. Following the revocation of the relevant articles of UK EMIR and its technical standards, references to those pieces of legislation should be read as references to the relevant parts of the Bank’s rules.

Bank’s objective analysis

10.14. The assessment of the impact of proposals relating to business continuity on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

Cost benefit analysis

10.15. The costs and benefits of the proposals to restate existing business continuity requirements for CCPs into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law.

‘Have regards’ analysis

10.16. Our analysis of the application of ‘have regards’ relating to business continuity proposals are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of requirements relating to business continuity?

Chapter 11: Operational Resilience

11.1. This chapter sets out the Bank’s proposals to restate UK EMIR provisions relating to operational resilience in Bank rules, with minor modifications described in this chapter. The relevant material within Assimilated Law is set out in Article 35 of UK EMIR and Article 9 of CDR 153/2013.

11.2. Article 35 of UK EMIR specifies that when a CCP outsources operational functions, services or activities it must remain fully responsible for discharging all of its functions under the Regulation. A CCP is subject to further obligations in respect of outsourcing arrangements, including that the CCP does not delegate its responsibilities, that it does not prevent the exercise of supervisory and oversight functions, and that the CCP has direct access to relevant information on the outsourced functions. CCPs must allocate and set out the arrangements in a written agreement and make available all relevant information necessary to the Bank, and are not permitted to outsource major activities linked to risk management without the Bank’s approval.

11.3. The Bank’s Supervisory Statement on Outsourcing and Third Party Risk Management for Central Counterparties further explains the Bank’s supervisory approach to outsourcing, grounded in the requirements set out in this article. That supervisory statement covers expectations relating to governance and accountability, the pre-outsourcing phase and the content of written agreements. It will remain unchanged until it is reviewed, with the exception of those changes resulting from the Bank’s consultation on Operational resilience: operational incident and outsourcing and third-party reporting for financial market infrastructures. That consultation also proposes the introduction of rules requiring that CCPs notify the Bank in a prescribed form when they enter into or significantly change ‘material third-party arrangements’, which builds on the concept of ‘major activities linked to risk management’, and submit a structured register of these arrangements to the Bank. Following the revocation of the relevant articles of UK EMIR and its technical standards, references to that piece of legislation in the Bank’s supervisory statement on outsourcing should be read as references to the relevant parts of the Bank’s rules.

11.4. Article 9 of CDR 153/2013 sets out the requirements on a CCP’s information technology systems, to ensure that CCPs can continue to carry out their operations in a secure and efficient manner. These include effectively documenting their systems, ensuring they are designed to deal with the CCP’s operational needs, and having capacity to deal with disruption as well as planning for change. CCPs are required to base their systems on international standards and industry best practices, and subject them to testing which involves their participants and other interested parties. Finally, they are required to maintain a robust information security framework, which includes features such as access controls and safeguards against intrusion, and review the systems on at least an annual basis and subject them to audits.

11.5. These provisions aim to ensure the operational resilience of CCPs, both to minimise the likelihood of operational disruption occurring and mitigating and recovering from such disruption when it occurs. This seeks to ensure that any disruption to the provision of a CCP’s critical clearing services is minimised, reducing the impact on the CCP’s participants and the broader financial system. The Bank proposes to restate these provisions in Bank rules with changes outlined below.

11.6. The proposed Operational Resilience Part for the CCP rules is set out in Annex 2.

11.7. Article 35 of UK EMIR states that CCPs must not outsource major activities linked to risk management unless such outsourcing is approved by the Bank. The Bank proposes to replace the existing approval process under Article 35 of UK EMIR with a requirement to seek a permission given under section 138BA of FSMA. This achieves the same effect as the existing procedure under Article 35(1) of UK EMIR by which the Bank approves such outsourcing, as set out in rule 2.2 of the Operational Resilience part of the Bank rulebook.

11.8. The Bank’s proposed approach to giving this regulatory permission is set out in the Statement of Policy – The Bank of England’s approach to outsourcing permissions (the Outsourcing Permissions SoP), as set out in Annex 3. This Statement of Policy establishes:

1. the information that the Bank will require as part of the initial application for the permission, including a completed version of the template required under rule 2.1 of the Notifications and Regulatory Reporting for CCPs Part of the Bank of England FMI rulebook;
2. the supporting evidence that the Bank will require in respect of the criteria for permission, including the proposed written agreement relating to the outsourcing arrangement and documentation relating to the steps the CCP has taken to comply with relevant requirements and expectations;
3. the Bank’s approach to assessing the application, including that the Bank may set a timeline and process for the transition to the arrangement, the factors that the Bank will consider, and that the Bank in general expects to determine the outcome of an application within 80 business days; and
4. the Bank’s approach to making a decision on an application, including that if an application is rejected it will state the reasons, and its approach to varying or revoking a permission.

11.9. The Statement of Policy should be read alongside the Bank’s ongoing consultation and proposed Statement of Policy on its approach to rule permissions and waivers. The Bank does not expect these changes to have any impact on CCPs with existing approvals.

Bank’s objective analysis

11.10. The assessment of the impact of proposals to restate operational resilience requirements on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law. Replacing the existing approval process for outsourcing major activities linked to risk management with the permissions given using section 138BA FSMA would continue to allow the Bank to take timely supervisory action if necessary to ensure safeguards remain effective and appropriate in changing circumstances.

11.11. The outsourcing of major activities linked to risk management may pose a significant operational risk to the CCP. It is therefore desirable to have a robust process through which the Bank confirms that it is content with the arrangements before they are put in place. This supports confidence in the FMI itself, supporting innovation more broadly. The proposed criteria are also transparent, enabling FMIs to plan, and technology neutral, consistent with the Bank’s secondary objective to facilitate innovation.

‘Have regards’ analysis

11.12. Our analysis of the application of ‘have regards’ relating to operational resilience proposals is set out in Chapter 2 – Restatement of Assimilated Law. In addition, the following factors were significant in the Bank’s analysis of its proposed approach to outsourcing permissions:

1. Transparency: The Bank considers that its proposed changes in relation to the use of permission power would provide greater clarity to CCPs, which would promote a more transparent and consistent application of Bank rules. Similarly, the proposed SoPs would improve transparency around how the Bank exercises its functions in relation to outsourcing permissions by providing clear guidance on the criteria and process involved. This would help market participants understand the Bank's expectations and decision-making process.

Cost benefit analysis

11.13. The Bank considers that the policy proposals relating to operational resilience do not amount to a change in the existing policy intent and so the Bank does not expect the proposals to have any impact on CCPs and the existing approvals of outsourcing arrangements. The costs and benefits of proposals relating to restatement of operational resilience requirements are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of requirements relating to operational resilience?

Chapter 12: Conduct of Business

12.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements relating to conduct of business in the Conduct of Business Part of the CCP rules, with minor modifications described in this chapter. The Conduct of Business Part for the CCP rules is set out in Annex 2. The relevant material within Assimilated Law is set out in Articles 36, 37, 38, 39 of UK EMIR.

12.2. Article 36 of UK EMIR requires CCPs to act fairly and professionally in accordance with the best interests of its clearing members. It further requires CCPs to have accessible, transparent and fair rules for the prompt handling of complaints.

12.3. Article 37 outlines the participation requirements that CCPs must establish for clearing members. Participation requirements must have clear, non-discriminatory, and objective criteria for admitting clearing members, ensuring clearing members have adequate financial resources and operational capacity. These criteria must be met on an ongoing basis and must be reviewed by the CCP on an annual basis. CCP must also have objective and transparent procedures for suspending or removing clearing members who fail to meet the criteria. Clearing members clearing on behalf of clients must meet additional financial and operational requirements, and CCPs must monitor risks related to client services. CCPs can impose additional obligations, such as participating in auctions for defaulting members’ positions, provided these are proportionate to the risks brought by the clearing member.

12.4. Article 38 outlines transparency rules for CCPs. This set of rules aim to ensure that CCPs appropriately disclose information about their services prices, fees, costs and revenues to appropriate stakeholders, including clearing members, the Bank and or the public. CCPs must track their costs and revenues separately and provide this data to the Bank. CCPs must explain the risks of their services to clearing members and clients and share price details used for daily exposure calculations with both clearing members and authorities. Additionally, CCPs must publish transaction volumes, outline the technical requirements for communication systems, and report clearing member rule breaches unless it could harm financial stability, market confidence, or would seriously jeopardise the financial markets or cause disproportionate damage to those involved. The provisions currently outlined within Article 38 (6) and (7) are proposed to be restated in the Margin Requirements Part of the CCP rules.

12.5. Article 39 outlines the rules in relation to segregation of accounts and porting for CCPs. These provision sets out the requirements for CCPs to ensure they are able to accurately and easily identify the accounts and positions held by individual clearing members, and where relevant, clients of clearing members. It also articulates the responsibilities of the CCP in relation to the level of segregation within client accounts, and the legal implications that must be considered in these arrangements. The Bank is proposing to define the term ‘security financial collateral arrangement’ in line with the existing interpretation of UK EMIR. This is a clarificatory change and does not aim to alter the underlying policy intent. Taken together the above titles will form the Conduct of Business Part of the CCP rules.

12.6. The Bank is proposing to restate the content of CCP-facing requirements set out in Articles 36 to 39 of UK EMIR in CCP rules with minor changes outlined in the following paragraphs Article 38(1) of UK EMIR includes a requirement on CCPs to allow clearing members and, where relevant, their clients, separate access to the specific services provided. The Bank considers this requirement is more appropriately placed within Chapter 3 Participation Requirements Part of the CCP rules and proposes relocating it as rule 3.9, as opposed to including it together with the other provisions that replicate Article 38 in Chapter 4 (Transparency). The Bank has made this change for clarity and with no intention to change the intended policy effect of this provision.

12.7. Article 38(5) of UK EMIR requires CCPs to publicly disclose breaches by clearing members of the criteria referred to in Article 37(1) and the requirements laid down in Article 38(1), except where the Bank considers that such disclosure would constitute a threat to financial stability or to market confidence or would seriously jeopardise the financial markets or cause disproportionate damage to the parties involved. The Bank considers that it is appropriate to restate this provision as an instance where the Bank may use its requirement power under FSMA. The Bank proposes to add an exception of such disclosure by the CCP of breaches by clearing members in instances where the Bank makes use of the requirement power to advance its financial stability objective. The use of this power will be in line with the Bank’s statement of policy ‘The Bank of England's approach to statutory notice decisions for use of its requirement power.^{footnote [26]} This statement of policy outlines the procedure, governance and basis for a use of the requirements power by the Bank.

12.8. The Bank is also proposing to restate further guidance on disclosing information by CCPs that is currently outlined in the ESMA Q&As on EMIR implementation^{footnote [27]} in rule 4.1 of the Conduct of Business Part of the CCP rules. This inclusion aims to ensure that the transparency rules are clear, standardised and reflect the Bank’s current expectations. The language included in this section specifically outlines that prices and fees associated with CCP services are disclosed in a numerical format; that CCPs must disclose the prices and fees of each service provided separately using numerical figures, including discounts and rebates and the conditions to benefit from those reductions and ensure that it is possible to reasonably estimate the costs of services provided by different CCPs.

12.9. The changes outlined above are not intended to alter the outcome of the proposed rule. They aim to enhance clarity, ensure consistency, and support the effective implementation of Conduct of Business Part of the CCP rules without changing policy intent.

Bank’s objective analysis

12.10. The assessment of the impact of proposals relating to conduct of business on the Bank’s primary and secondary objectives is covered by the analysis set out in paragraphs of Chapter 2 – Restatement of Assimilated Law.

12.11. The Bank considers that the proposed instance where the Bank may use its requirements power to prevent a disclosure under rule 4.7 of the Conduct of Business Part (which restates UK EMIR A38(5)) advances the Bank’s financial stability objective. A requirement made under this power would be with the direct intention to advance the financial stability objective as outlined in the conditions in 12.7.

‘Have regards’ analysis

12.12. Our analysis of the application of ‘have regards’ relating to conduct of business requirements proposals are set out in Chapter 2 – Restatement of Assimilated Law.

Cost benefit analysis

12.13. The costs and benefits of the proposals to restate existing conduct of business requirements for CCPs into CCP rules are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of requirements relating to Conduct of Business?

Chapter 13: Exposure Management

13.1. This chapter sets out the Bank’s proposals to restate UK EMIR provisions relating to exposure management in Bank rules. The relevant material within Assimilated Law is set out in Article 40 of UK EMIR. Article 40 UK EMIR requires CCPs to effectively measure, monitor, and manage their exposures to clearing members and other CCPs where relevant. It also states that CCPs should have access to the pricing information, where reasonable, that allows it to effectively measure its exposures.

13.2. The Bank is proposing to restate the content of this provision without modifications. The proposed Exposure Management Part for the CCP rules are set out in Annex 2.

Bank’s objective analysis

13.3. The assessment of the impact of proposals to restate exposure management requirements on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

13.4. Restatement of requirements related to exposure management furthers the Bank’s financial stability objective as it places an expectation on the CCP to effectively measure its own exposures. This awareness helps the CCP effectively manage risk in the markets it clears and supports its ability to maintain sufficient resources to absorb losses should they arise. This helps mitigate contagion risks, should a clearing member default.

‘Have regards’ analysis

13.5. Our analysis of the application of ‘have regards’ relating to capital requirements proposals are set out in Chapter 2 – Restatement of Assimilated Law.

Cost benefit analysis

13.6. The Bank considers that the policy proposals relating to exposure management do not amount to a change in the existing policy intent and so the Bank does not expect the proposals to have any impact on CCPs. The costs and benefits of proposals relating to restatement of exposure management requirements are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of requirements relating to exposure management?

Chapter 14: Margin

14.1. This chapter sets out the Bank’s proposals to restate UK EMIR provisions relating to margin requirements in the Margin Requirements Part of the Bank rules, subject to changes set out in this chapter. The relevant Assimilated Law provisions are set out in Article 38(6)–(7) and Article 41 of UK EMIR and Articles 24 – 28, 56(1) and part of 61(1) of CDR 153/2013.

14.2. CCPs collect margin to limit their credit exposures from their clearing members and, where relevant, from CCPs with which they have interoperability arrangements. UK EMIR sets out requirements in respect of CCPs’ margining practices, including provisions on imposing, calling, collecting and monitoring margin levels; the models and parameters a CCP shall adopt in setting its margin requirements; and transparency requirements.

14.3. Article 38 of UK EMIR outlines CCP transparency requirements in relation to their margining practices. CCPs are required to provide clearing members with a margin simulation tool allowing them to determine the margin requirements. CCPs must also provide information on their initial margin models’ design, operation, assumptions, and limitations. This includes the nature of any tests performed on the models, a summary of those results, and any corrective actions taken, as specified under Article 61(1) of CDR 153/2013.

14.4. Under Article 41 of UK EMIR CCPs are required to call and collect margins to limit relevant credit exposures, ensuring the margins are sufficient to cover potential exposures until the liquidation of the relevant positions. CCPs are also required to regularly monitor and adjust margins to reflect market conditions, accounting for potential procyclical effects. CDR 153/2013 Articles 24–28 specify further detail on how margin should be calculated. Article 56(1) details how CCPs must review their models based on the results of their stress and back tests.

14.5. The Bank proposes to restate these provisions in the Margin Requirements Part of the CCP rules, subject to certain changes. The proposed Margin Requirements Part of the CCP rules is set out in Annex 2.

14.6. The proposed changes include updating requirements relating to margining practices in line with ESMA Guidelines V.1 and V.5 on EMIR Anti-Procyclicality Margin Measures for CCPs (April 2019) and the final reports recently published by BCBS, CPMI and IOSCO on Transparency and responsiveness of initial margin in centrally cleared markets and Streamlining variation margin in centrally cleared markets (January 2025). Should there be any, the Bank’s proposals will consider any further amendments as these international proposals are implemented by the international standard setters. The Bank’s proposed changes also draw on the final CPMI-IOSCO report on the resilience of CCPs (July 2017).

14.7. The proposed changes would ensure that CCPs will continue to be subject to stringent risk management standards and be resilient to client and clearing member defaults and other stress events.

Context to policy proposals

14.8. The UK’s margin framework has been tested during periods of elevated volatility that occurred over the past few years, through which CCPs generally performed well. According to the Financial Stability Board’s (FSB) Holistic Review of the March Market Turmoil report published in response to the ‘dash for cash’, CCPs more broadly were able to ‘absorb rather than amplify the macroeconomic shock, supported by post-2007–08 crisis reforms’ (November 2020). However, large and unpredicted increases in centrally cleared margin requirements may have played a role in amplifying liquidity strains on market participants during volatile periods. As part of the FSB’s work programme to enhance the resilience of the non-bank financial intermediation sector, international work was launched to examine the role of margining practices in amplifying funding strains.

14.9. This work resulted in BCBS-CPMI-IOSCO reports setting out policy proposals designed to improve market participants' understanding of margin calculations:

1. The report on transparency and responsiveness of initial margin in centrally cleared markets set out final policy proposals to improve market participants' understanding of centrally cleared initial margin calculations and potential future margin requirements. They cover aspects of CCP transparency, governance and review of initial margin models, as well as clearing member transparency to their clients and the CCPs of which they are members.
2. The report on streamlining variation margin in centrally cleared markets sets out eight practices to enhance market participants' liquidity preparedness for above-average variation margin calls through increased transparency and the efficient collection and distribution of variation margin in centrally cleared markets.

14.10. The revocation of UK EMIR margin requirements is an opportunity for the Bank to consult on its intended implementation of the international policy proposals into CCP rules and guidance. The Bank actively contributed to this international work and will continue to do so to finalise areas requiring further cooperation, for example implementing changes via the CPMI-IOSCO Public Quantitative Disclosure standards, which support implementation of the PFMI. CCPs remain subject to regular supervisory review against the PFMI. The Bank supports the findings set out in the reports; some of the key conclusions include the need for greater transparency on initial margin models (including through appropriate disclosures and the provision of enhanced margin simulation tools) and appropriate governance arrangements on the setting of initial margin requirements.

14.11. In addition to the proposed changes, the Bank proposes to issue a supervisory statement on CCP margin (herein referred to as the Margin SS) setting out how CCPs can comply with the Bank’s expectations regarding the management of initial margin procyclicality (Chapter 3 of the Margin SS), including in the design and review of initial margin models, as well as with the Bank’s expectations regarding portfolio margining (Chapter 4 of the Margin SS),^{footnote [28]} the provision of a margin simulation tool (Chapter 5 of the Margin SS), and the monitoring of margin (Chapter 6 of the Margin SS). This guidance also incorporates the other ESMA guidelines on anti-procyclicality margin measures as relevant. The Margin SS can be found in Annex 5.

Proposal 1: Enhancements to initial margin practices

14.12. The Bank proposes to make targeted enhancements as described below to the UK’s margin framework, in line with the above proposals.

1. The Bank proposes to require CCPs to provide margin simulation tools to clearing members and, where requested, to clients of clearing members, prospective clearing members and their clients. The Bank also proposes to specify the minimum functionality that CCP margin simulators shall include (rules 5.1–5.3 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposals 1 and 2 as set out in the report on initial margin in centrally cleared markets. CCP margin simulators would be required to include, at a minimum, functionality allowing the calculation of margin requirements for a number of the CCP’s stress test scenarios, including key historical market stress events for current and hypothetical portfolios, and to incorporate the CCP’s main add-on charges that are systematically required across clearing members in addition to regulatory initial margin. CCP margin simulators would need to reflect all material components of the underlying quantitative methodologies. Further guidance on the provision of the margin simulation tool is set out in Chapter 5 of the Margin SS (Annex 5).
2. The Bank proposes to enhance the qualitative information that CCPs would be required to provide to their clearing members related to that CCP’s margin model and to extend the provision of such information to clients, where requested (rule 4.3 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposal 3 as set out in the report on initial margin in centrally cleared markets. The information would include an explanation of the design of the models and how they operate, their key assumptions and limitations, the rationale for the model used and the calibration of its key parameters, including relevant components affecting the size and speed of margin requirements during elevated stress periods, as well as the applicable thresholds and a description of the data used for the calculation of margin add-ons.
3. The Bank proposes to require CCPs to publicly disclose certain information regarding CCPs’ models for regulatory initial margin, including describing the anti-procyclicality tools used in their margin models and, at a high level, the model components that affect model procyclicality, in sufficient detail to support the replication of regulatory initial margin (rules 4.5–4.7 of the Margin Requirements Part) – taking into account ESMA Guideline V.5, BCBS-CPMI-IOSCO Proposal 4 on initial margin in centrally cleared markets, and paragraph 2.2.23 of the final CPMI-IOSCO report on the resilience of CCPs. Model components to be disclosed include the confidence interval, the lookback period, and the liquidation period, in addition to the other components set out in rule 4.6. In line with the CPMI-IOSCO report on CCP resilience, CCPs must ensure the information disclosed is sufficiently detailed to support the replication of regulatory initial margin calculations and anticipation of large revisions.
4. The Bank proposes to require CCPs to identify and define an analytical and governance framework for assessing margin procyclicality within the broader context of margin coverage and cost, with the framework and parameter choices communicated to the Bank (rules 3.20–3.23 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposal 7 on initial margin in centrally cleared markets. The framework would allow the CCP to regularly monitor regulatory initial margin model performance.
5. The Bank proposes to require CCPs to identify clear governance procedures for overriding initial margin models, and to undertake ex post reviews where such discretion has been applied (rules 3.28–3.29 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposal 8 on initial margin in centrally cleared markets. CCPs would be required to have governance procedures in place for the application of model overrides and clearly articulate and define the instances and areas where such overrides may be warranted and to establish guidelines and processes to identify and monitor the overridden risk variable or model output, with input from market participants.
6. The Bank also proposes to require CCPs to disclose to the Bank the aggregate size and duration of manual overrides as compared with unadjusted initial margin requirements, to provide clearing members a qualitative explanation for any use of discretion, and to publicly disclose information on instances when discretion may be applied (rules 4.1, 4.2, 4.4 and 4.8 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposal 8 on initial margin in centrally cleared markets. CCPs would be required to communicate to the Bank their governance procedures for the application of model overrides. CCPs would also be required to disclose to the Bank the aggregate size and duration of manual overrides, supported by a qualitative explanation of the reasons for the override. Further, CCPs would be required to share a qualitative explanation of the reasons for any use of discretion with affected clearing members. CCPs would then be required to publicly disclose relevant information on the instances when discretion may be applied and associated governance procedures.

14.13. The Bank considers that these proposals would, among other things, promote the management of procyclical initial margin requirements and market participant preparedness in centrally cleared markets.

14.14. As discussed in Chapter 1, CCPs will have 12 months from the date rules are published to comply with the proposals on the margin simulation tool (rules 5.2 and 5.3 of the Margin Requirements Part) and should in the meantime comply with rule 5.1 which re-states the requirements of Article 38(6) of UK EMIR. CCPs should comply with all other margin proposals within the six-month implementation timeline proposed for all rules.

Proposal 2: Enhancements to variation margin practices

14.15. The Bank proposes to amend the UK’s framework on CCP variation margin (VM) in line with the effective practices set out in the BCBS-CPMI-IOSCO report on VM in centrally cleared markets. These effective practices are not expected to form part of international guidance but to serve as guidelines on how to effectively implement existing standards. The Bank believes there is value in reflecting a subset of the effective practices in Bank rules. Those include the effective practices which are amenable to rules, ie those which are clear and actionable, and which support financial stability:

1. The Bank proposes to require CCPs to consider the impact of its intraday collections and payments on the liquidity position of its clearing members (rule 2.7 of the Margin Requirements Part) – taking into account Effective Practice 3 as set out in the report. While being able to issue more frequent or ad hoc intraday margin calls helps CCPs meet their risk management needs, there are liquidity implications for participants. For example, more frequent intraday VM calls, particularly during periods of elevated volatility, can create additional liquidity demands, which can be challenging to meet and potentially exacerbate stressed market conditions. Scheduled intraday VM calls increase predictability and can foster participants' liquidity preparedness.
2. The Bank proposes to require CCPs to provide certain information to its clearing members regarding the CCP’s processes and timing for intraday VM calls (rule 4.9 of the Margin Requirements Part) – taking into account Effective Practice 6 as set out in the report.

Proposal 3: Proposals on procyclicality

14.16. The Bank proposes to make targeted enhancements in line with the BCBS-CPMI-IOSCO proposals, as detailed above in 14.11(iv), and to restate in Bank rules the substance of the ESMA guidelines on the regular assessment of margin procyclicality. The Bank considers that converting these proposals and guidelines on the procyclicality assessment framework into legally binding requirements would promote financial stability by enhancing UK standards related to CCPs’ management of margin procyclicality.

1. The Bank proposes requiring CCPs to identify and define an analytical and governance framework for assessing procyclicality, to use that framework in governance decisions, to inform the Bank of that framework and its parameter choices, and to ensure that framework can be used to regularly monitor the performance of models for regulatory initial margin (rules 3.20–3.23 of the Margin Requirements Part) – taking into account BCBS-CPMI-IOSCO Proposal 7 on initial margin in centrally cleared markets.
2. The Bank proposes to require CCPs to regularly assess procyclicality, consider potential procyclicality implications of revisions to its model parameters, review and adjust policies to address procyclicality when procyclical effects arise from initial margin, and maintain records of its review (rules 3.25–3.27 of the Margin Requirements Part) – taking into account ESMA Guideline V.1 on anti-procyclicality margin measures.
3. The Bank proposes to require CCPs to define a tolerance for procyclicality among other elements of its assessment framework that it must specify (rule 3.24 of the Margin Requirements Part) – taking into account ESMA Guideline V.1 on anti-procyclicality margin measures. The other elements of the assessment framework that CCPs must specify include the quantitative metrics used to assess procyclicality, the frequency of assessment, the potential actions to address the outcome of the assessment, and related governance arrangements.

14.17. The Bank already expects UK CCPs to define a tolerance for procyclicality as part of a wider internal policy for reviewing their anti-procyclicality measures as set out in the relevant ESMA guidelines.^{footnote [29]} In order to comply with this existing expectation, CCPs already have an internal framework in place for defining a procyclicality tolerance, and for reviewing initial margin procyclicality more widely. These proposals bring these existing expectations into Bank rules.

14.18. The practical application of the procyclicality tolerance will remain unchanged, such that this internal tolerance would not act as a cap on initial margin changes. Initial margin requirements may breach the tolerance to provide adequate coverage, although the CCP should promptly investigate and consider whether the model should subsequently be revised to avoid such a breach in future. This tolerance can be used to inform supervisory discussion on the likely scale of changes in initial margin over a pre-defined time horizon, in most market conditions.

14.19. As noted above, further guidance on the Bank’s expectations regarding a CCPs’ application of the procyclicality tolerance, as well as the assessment framework and anti-procyclicality measures more broadly, are set out in Chapter 3 of the Margin SS in Annex 5.

14.20. The Bank believes that the proposed changes to margining practices will help firms better prepare for, and meet, spikes in margin requirements.

Proposal 4: Clarificatory and minor changes

14.21. In addition to the policy proposals set out above, the Bank proposes to make some clarificatory changes, as described in the following paragraphs.

14.22. Article 41(1) of UK EMIR sets out requirements related to the calling and collecting, scope, and monitoring of margin. The Bank proposes to clarify Article 41(1) by introducing a definition of regulatory initial margin as the amount of collateral calculated by a CCP in accordance with the requirements under Chapter 3 of the Margin Requirements Part, which are the CCP rules relating to the design and adoption of models and parameters, confidence intervals, time horizons for the calculation of historical volatility (the lookback period), time horizons for the liquidation period, procyclicality, and model overrides. This excludes add-ons.

14.23. The Bank proposes to introduce a definition of add-ons, which are additional amounts of collateral required to cover market and non-market risks that are not fully covered by the model for regulatory initial margin. Alongside introducing a definition of add-ons, the Bank proposes to specify that CCPs must adopt methodologies for calculating any such add-ons, as CCPs would be doing in practice (rule 3.3 of the Margin Requirements Part).

14.24. The definitions for initial margin and variation margin are taken from Article 1(5) and 1(6) CDR 153/2013 with minor modifications to clarify that such margins are ‘called’ as well as ‘collected’ (with the deletion of ‘imposed’). The definition of ‘margins’ taken from Article 1(4) CDR 153/2013 will also be modified to margin, which is collateral called and collected by a CCP to cover its current and potential future exposures, and includes initial margin and variation margin. The purpose of these changes is to provide clarity on these terms and to minimise circular references to margin. These definitions are included in Annex 2 of this CP (Draft Bank Instruments – Glossary Instrument).

14.25. The Bank proposes to make minor changes throughout to clarify which type of margin is being referred to in the rules and, where relevant, to modify the rules to reflect the language used (eg ‘collateral’) in the updated definitions, as outlined above. This includes updating the definition of ‘liquidation period’ from CDR 153/2013 to specify that the liquidation period refers to ‘initial margin’ rather than ‘margins’.

14.26. Article 26 CDR 153/2013 sets out how CCPs should calculate time horizons for the liquidation period. The Bank proposes to use ‘trading’ instead of ‘business’ day(s) to refer to the trading days of the principal jurisdiction where a given financial instrument is traded, which may differ from business days in the UK (rule 3.13(4) of the Margin Requirements Part).

14.27. The Bank proposes to define ‘UK regulated market’ by reference to Article 2(1)(13A) of UK MiFIR. This is a clarificatory change in keeping with its meaning in UK EMIR. In addition, the Bank proposes to introduce a definition of ‘equivalent overseas market’ as a standalone term in line with the existing interpretation of the equivalent term in UK EMIR. This is a clarificatory change and the update from references to ‘third country’ to ‘overseas’ is in keeping with other areas in the CCP rules.

14.28. The Bank proposes updating Article 41(1) of UK EMIR to require CCPs to ‘continuously’ monitor and, if necessary, revise the level of their margins to reflect current market conditions, rather than ‘regularly’ doing so (rule 2.3 of the Margin Requirements Part). This change is to facilitate a CCP’s monitoring of metrics that are relevant to its margin model and indicate a CCP’s intraday risks. Further guidance on this is set out in Chapter 6 of the Margin SS (Annex 5).

14.29. Art 28 of CDR 153/2013 requires CCPs to take into account the potential procyclical effects of revisions when revising its model parameters to better reflect current market conditions. The Bank proposes to clarify that CCPs should consider the potential effects of setting and revising model parameters on margin coverage and margin cost in addition to margin procyclicality (rule 3.19 of the Margin Requirements Part). The Bank also proposes to add these as defined terms in the Margin Requirements Part. These changes reflect that there is a trade-off between these three factors that we refer to as the ‘trilemma’, which is detailed further in Chapter 3 of the Margin SS (Annex 5).

14.30. Under Article 41(2) of UK EMIR, the Bank is required to validate margin models and parameters. The Bank proposes to replace the existing margin model validation process with permissions given using section 138BA of FSMA to approve a CCP’s models for setting its requirements on regulatory initial margin. CCPs must not adopt such models unless the Bank has first given permission (rule 3.2 of the Margin Requirements Part). The Bank proposes to remove ‘and parameters’ to clarify that CCPs will not be required to seek a separate permission under rule 3.2 for the adoption of a new parameter subsequent to the initial adoption of a model, which will instead be considered to be a model change. In that case, CCPs should follow the process for model changes and determination of materiality as set out in Chapter 21 of this CP and the Review and Testing of Models and Parameters Part of the CCP rules.

14.31. Under Article 26(1)(c)(v) CDR 153/2013, when determining the appropriate time horizon for the liquidation period to be one trading day for financial instruments other than OTC derivatives held in omnibus client accounts or in individual client accounts, CCPs may classify the amount of intraday margin to be paid to the CCP as ‘not material’ if agreed by the Bank. The Bank proposes to replace this requirement with permissions given under section 138BA of FSMA (rule 3.13(4)(c)(v) of the Margin Requirements Part).

14.32. Under Article 26(4) of CDR 153/2013, CCPs may use a time horizon for the liquidation period different from the five business days specified in Article 26(1) of CDR 153/2013 for OTC derivatives that have the same risk characteristics as those executed on regulated markets if agreed by the Bank. The Bank proposes to replace this requirement to demonstrate compliance with the criteria set out in Article 26(4) of CDR 153/2013 with permissions given under section 138BA of FSMA (rule 3.16 of the Margin Requirements Part).

14.33. Under Article 27(3) of CDR 153/2013 all financial instruments to which portfolio margining is applied must be covered by the same default fund. CCPs are allowed to take an alternative approach and apply portfolio margining to financial instruments covered by different default funds where they are able to demonstrate to the Bank how potential losses would be allocated among different default funds. The Bank proposes to retain the underlying requirement to comply with the criteria, but to replace the requirement to demonstrate compliance to the Bank with permissions given under section 138BA of FSMA (rule 2.12 of the Margin Requirements Part).

14.34. The proposed changes set out in paragraphs 14.30–14.33 achieve the same effect as the existing requirements and, as these changes are forward-looking, the Bank expects that any existing relevant approvals will be considered to have continued effect, subject to the normal process of review by the Bank should there be a change in circumstances.

14.35. The Statement of Policy on supervisory processes and margin permissions (‘The Bank of England’s approach to supervisory processes (model changes, recognition orders and variations of recognition orders) and margin permissions’) sets out the Bank’s approach to giving these regulatory permissions under the specific circumstances and criteria detailed in Chapter IV on ‘The Bank’s approach to margin permissions as set out in rules 3.2, 2.12, 3.13(4)(c)(v), and 3.16’ (henceforth referred to as Chapter IV on margin permissions, (Annex 4). Chapter IV on margin permissions sets out:

1. the information that the Bank will require as part of the initial application for permission to adopt a model when setting regulatory initial margin requirements as under rule 3.2 or to modify rules 2.12, 3.13(4)(c)(v), and 3.16. This will depend on whether a CCP is seeking permission as part of an application for recognition or variation of recognition (Chapter III of the SoP) or to make a material model change (Chapter II of the SoP);
2. that the Bank considers that there is a material change to a model when a CCP seeks permission to modify rules 2.12, 3.13(4)(c)(v), and 3.16. CCPs should therefore submit applications for permission to modify these rules in line with the processes set out in Chapter II of the SoP;
3. the supporting evidence that the Bank will require to allow the Bank to assess whether the proposed changes would meet the CCP’s other obligations under the Margin Requirements Part and the specific criteria as in paragraphs 2.15 to 2.17 of Chapter IV on margin permission for the modification of rules 2.12, 3.13(4)(c)(v), and 3.16;
4. the Bank’s approach to assessing the application, including timelines and factors the Bank will consider. Timelines will depend on whether the CCP is seeking permission as part of an application for recognition or variation of recognition (Chapter III of the SoP) or to make a material model change (Chapter II of the SoP). Paragraphs 2.22–2.25 of Chapter IV on margin permissions explain the factors that the Bank will consider in assessing the application for permission; and
5. the Bank’s approach to making a decision on an application, including that if an application is rejected it will state the reasons, and its approach to varying or revoking a permission.

Bank’s objective analysis

14.36. The assessment of the proposals to restate Articles 38(6)–(7) and 41 of UK EMIR and Articles 24–28, 51(1), and part of 61(1) of CDR 153/2013 on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations on the impact of proposed policy changes on the Bank’s primary and secondary objectives are set out below.

14.37. The Bank considers that enhancing its margin requirements in line with the international margin proposals will advance its Financial Stability Objective through increasing CCP transparency in relation to their margining practices and the enhancement of clearing members’ ability to predict and meet margin calls. A better understanding of how margin requirements are set will facilitate clearing members’ ability to estimate future liquidity needs and therefore to prepare for future margin calls. In turn, this can reduce the likelihood of market participant default as a result of large, unexpected margin calls. Further, reducing the impact of procyclical centrally cleared initial margin calls, subject to minimum regulatory coverage, would promote financial stability by limiting the amplification effects of margin calls on funding strains.

14.38. Policy proposals to enhance margin requirements are consistent with the Secondary Innovation Objective. Disclosures on model performance (such as the provision of margin simulators) and on model methodology (such as qualitative disclosures on the model’s design) will allow for greater scrutiny of CCPs’ risk management decision-making. This in turn could incentivise CCPs to enhance the design of both their models and their offering more generally. Additionally, we expect that placing a clearer focus on margin responsiveness, in the context of margin coverage and margin cost, will promote innovation in the design and operation of margining practices, making them more effective. We believe there are clear benefits to improving the quality and efficiency of services offered.

‘Have regards’ analysis

14.39. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to margin requirements are set out in Chapter 2 – Restatement of Assimilated Law.

14.40. In addition, the Bank considers the following factors, to which the Bank is required to have regard, as significant in shaping the proposals set out in this chapter:

1. Facilitating fair and reasonable access to FMI services: The Bank considers that ensuring fair and reasonable access to FMI services is a significant factor in the development of the proposals for margin requirements. In particular, the proposals to enhance CCP margin transparency will provide market participants (and prospective market participants, including prospective clearing members) with relevant information on margining practices and associated margin calls in centrally cleared markets.
2. Responsibilities of FMIs’ senior management: The Bank considers that this is a significant factor in the development of the margin requirements proposals. The proposals are not prescriptive and recognise that senior management of CCPs are responsible for determining the CCP’s tolerance for procyclicality, designing margin models accordingly, and determining how to respond to breaches of tolerance levels.
3. Publishing information: The Bank considers that this is a significant factor in the development of the margin requirements proposals. Requiring CCPs to disclose the information set out in the Margin Requirements Part to the Bank, to clearing members and clients, and to the public will help the Bank advance its Financial Stability Objective by increasing transparency around CCPs’ margining practices and enhancing clearing members’ ability to predict and meet margin calls.
4. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: The Bank considers that these proposals will also benefit the financial stability of non-UK countries and territories. As set out above, large and unforeseen changes in margin requirements creates liquidity strains for centrally cleared market participants and can amplify market stress in volatile times. These proposals aim to enhance transparency in margin practices and therefore the ability of clearing members to predict and meet margin calls, which mitigates these financial stability risks. The proposals also aim to enhance procyclicality management practices, encouraging CCPs to consider margin responsiveness, which means market participants would be less likely to experience large and unexpected changes in initial margin. As UK CCPs operate globally and provide services to market participants outside the UK, these proposals directly enhance financial stability in non-UK countries and territories as well. Furthermore, the implementation of the BCBS-CPMI-IOSCO proposals on initial margin practices as set out above supports financial stability and resilience globally.

Cost benefit analysis

14.41. The costs and benefits of the proposals to restate Articles 38(6)–(7) and 41 of UK EMIR and Articles 24–28, 56(1), and part of 61(1) of CDR 153/2013 into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of policy proposals set out in this chapter are outlined in the following paragraphs.

Costs

14.42. Costs to CCPs: CCPs would face compliance costs to implement and monitor their own compliance with the new rules, although UK CCPs already monitor their compliance with existing requirements in UK EMIR, on which our proposal builds. Using the standard cost model, we estimate that CCPs would face approximately £620,000 in implementation costs (including and on the assumption of a small-scale one-off technology effort to enhance margin simulators in line with updated requirements, estimated at around £550,000 per firm) and then a further yearly £14,000 per firm in ongoing costs to enhance transparency measures and internal frameworks related to margining.

14.43. Costs to clearing members and clients: There should be no direct costs to the clearing members as the proposed policy does not attach any further costs or requirements onto them. There could, however, be indirect costs as CCPs could choose to pass on the extra costs they face to their customers, such as in the form of higher costs to using the CCP’s clearing services. Clearing members may also play a role in facilitating access for clients to margin simulators or disclosure information. Additionally, one mechanism by which CCPs can limit the procyclicality of their margin model (which is one of the objectives of some of our proposals) is by charging greater initial margin during stable periods. This could cause the average cost of margin to increase.

14.44. An increase in the cost of central clearing could, if it was very significant, disincentivise participants from using centrally cleared markets, potentially increasing counterparty credit risk. Further, higher average margin requirements require derivative users to hold more collateral-eligible assets than otherwise. These assets tend to be relatively liquid but low yielding. On balance, the Bank does not expect its proposals to have material impacts at the level of the economy or individual markets.

14.45. Costs for the Bank: The Bank does not expect any additional costs to be borne by the Bank’s supervisors as part of regular monitoring of compliance, which would be captured within the Bank’s existing supervisory activity.

Benefits

14.46. Financial stability benefits: Large and unforeseen changes in margin requirements can amplify market stress in volatile times. Significant margin calls could require market participants to liquidate non collateral eligible assets in order to meet their margin call. In crisis, the markets providing this liquidity may already face strains that would be exacerbated by ‘dash for cash’ behaviours, thus contributing to market disfunction and posing further risks to financial stability. The period of market volatility following the onset of the Covid-19 pandemic highlighted the potential procyclical risks of large and unexpected changes in margin calls. In March 2020, initial margin requirements in centrally cleared markets increased by $300 billion, driven by increased volatility. The size and speed of initial margin increases differed across CCPs, as well as across and within asset classes. This sudden, unpredicted increase in margin requirements led some market participants to face liquidity needs materially greater than anticipated, exacerbating liquidity strains for centrally cleared markets participants and contributing to wider financial stability risk.

14.47. In addition, in the case of a clearing member default at a CCP where a clearing member is unable to meet its margin call, there is potential for those losses to cascade through the system as they become mutualised. This could crystalise for members either through their unfunded exposures (powers of assessment) or through replenishing the CCP’s mutualised default fund. Both of those actions could exacerbate stress in the market as liquidity needs increase throughout the system. Similarly, the default of a clearing member's client can spread losses depending on that participant’s connections to other players of the financial system.

14.48. The Bank's proposals would mitigate these risks to financial stability by reducing the likelihood of market participants being unable to meet large, unforeseen changes in margin requirements by: (i) requiring CCPs to provide greater transparency about their margining practices, thus promoting market participant's understanding of these practices and their resulting preparedness to future changes in margin; and (ii) enhancing procyclicality management practices to encourage CCPs to consider margin responsiveness. Promoting the predictability of initial margin requirements would mean that market participants would be less likely to experience large, unexpected changes in initial margin.

14.49. The Bank's proposals would also promote financial stability by informing supervisory engagement between the Bank and UK CCPs. Under the proposals, CCPs would be required to provide additional information to the Bank on their governance frameworks (for example, on their framework related to the use of discretionary overrides). These governance frameworks help inform both internal decision-making at the CCP as well as supervisory discussions on both regular and ad-hoc bases. This would promote CCPs’ and the Bank’s ability to identify and mitigate risks, thus supporting financial stability.

14.50. Additionally, the Bank's proposals could incentivise central clearing, thus promoting financial stability by effectively reducing counterparty credit risk. Under the proposals, CCPs would be required to provide sufficient information on their margining practices to their clearing members and, where requested, their clients – and, in the case of providing margin simulators, prospective clearing members and clients. By enhancing market participants’ understanding and ability to prepare for future margin calls, this could facilitate access to and encourage clearing in centrally cleared markets.

14.51. Benefits to CCPs: The proposal is expected to reduce the likelihood of clearing members defaulting as a result of large, unforeseen margin calls, promoting market resilience and indirectly benefitting CCPs.

14.52. Benefits to clearing members and clients: Better preparing for future liquidity needs would mitigate the need for market participants to liquidate assets potentially at cost, or below market value, to meet liquidity needs during stress.

Chapter 15: Default Procedures

15.1. This chapter sets out the Bank’s proposals to restate requirements related to default procedures in the Default Procedures Part of the CCP rules, subject to modifications set out in this chapter. The relevant material within Assimilated Law is set out in Article 48 of UK EMIR, as well as Article 49(2) and related technical standards in Articles 58, 59(12) and 61(2) of CDR 153/2013.

15.2. Article 48 of UK EMIR requires CCPs to have detailed procedures in place where a clearing member does not comply with participation requirements. According to these procedures, a default is called if a clearing member is deemed unable to fulfil future obligations, at which point a CCP must notify the Bank. CCPs are required to act promptly to manage losses and liquidity pressures resulting from defaults, while safeguarding non-defaulting members from unanticipated losses. Article 48 also sets out the requirements on CCPs to enable the management of a clearing member default, providing clients of CCPs protection by maintaining updated records and designing default procedures to port client accounts from a defaulting clearing member to a designated non-defaulting clearing member.

15.3. Article 49(2) of UK EMIR and the related technical standards in Articles 58, 59(12) and 61(2) of CDR 153/2013 require the testing of default procedures and set out information that needs to be disclosed.

15.4. The Bank proposes to restate these provisions in its rules, subject to the changes described in this chapter, which aim to facilitate porting of client positions. The Bank proposes to include these provisions in a new Default Procedures Part.

Porting

15.5. Porting is the transfer of client positions and collateral from one clearing member to another to ensure the continuity of trading and clearing. Positions can be transferred when a clearing member defaults. If the client positions cannot be ported, as for instance no clearing member agrees to take the client account, a CCP must liquidate the client’s positions quickly to manage risks to the CCP, and to allow the client to re-establish their position while minimising loss of value. A large proportion of cleared positions are client positions (Figure 3), where house positions refer to positions belonging to the clearing member themselves, not the clients of the clearing member.

15.6. A higher rate of porting reduces losses to a CCP’s pre-funded resources (ie initial margin and default fund contributions) and reduces losses to clearing members as a result. This is supported by the results of the Bank’s 2024 supervisory stress test.^{footnote [30]} In the credit stress test with the baseline market stress scenario, LCH Swap Clear, LCH Forex Clear, LME Base, ICEU F&O all showed substantially higher losses under the assumption there was no porting, compared to when it was assumed all clients’ positions are ported. It is also economically efficient if solvent clients’ portfolios can be maintained at CCPs, rather than being liquidated and then re-established by the client purely because the client no longer has access to the CCP.

15.7. CCPs have short windows to facilitate porting. After this time expires, CCPs will liquidate outstanding client positions. Increasing this time could make porting more likely but creates a trade off as the losses that the CCP needs to absorb could grow if it is forced to wait for longer before liquidating the clients' positions of a defaulting clearing member.

15.8. Porting is generally expected to be more challenging in volatile market conditions, as the value of client portfolios may be changing significantly intraday making it more complex for a clearing member to risk manage those positions and more than one clearing member may be at risk of default. To increase the likelihood of clients’ positions being ported in the event of a clearing member default, Article 48(5) of UK EMIR requires CCPs to contractually commit themselves to trigger the procedures for the transfer of the client positions held by the defaulting clearing member. The clearing member to which positions are ported is only required to accept these positions where there is a previous contractual agreement in place between the clearing member and the client requiring the former to accept client positions.

15.9. UK EMIR provides a robust framework to facilitate porting and building on this the Bank is proposing targeted changes to increase the likelihood of successful porting in times of stress.

15.10. The Bank is proposing three modifications to porting requirements. The first proposal would require CCPs to include porting in their default management fire drills. The second proposal would ensure that CCPs trigger porting without proactively seeking client consent. The third change would require CCPs to factor portability into the allocation of default fund contributions between clearing members. The first two proposed changes are discussed in this chapter, while the third is covered in Chapter 16 – Default Fund.

Proposal 1: Requirement for CCPs to include porting in default management fire drills

15.11. Successful default management is a key function that CCPs provide to the market, and as such their default management procedures need to be regularly tested and updated to ensure they will be able to function if required. Article 49(2) of UK EMIR and articles 58 and 59(12) of CDR 153/2013 require CCPs to regularly test the key aspects of their default procedures, without specifying that porting should be a part of that. The Bank proposes a change to the restatement of the provisions of Article 49(2) to specify that all aspects of default management, including porting procedures, should be part of default procedure testing (rule 3.1 of the Default Procedures Part.) By doing so, the Bank wants to ensure that porting procedures are regularly tested by CCPs, so that any issues are identified regularly, improving awareness and readiness for both CCPs and clearing members, which would increase the likelihood that client positions are successfully transferred to an alternative clearing member after a default.

Proposal 2: Requirement for CCPs to trigger porting without proactively seeking client consent

15.12. Another barrier to successful porting the Bank has identified is the way clients give consent to be ported. Current UK EMIR rules require clients to request to be ported, ie to opt in at the time of a default to be ported. Where a client is in an individually segregated account, this is less challenging. However, in omnibus accounts, client consent requirements in effect mean that, if some clients are able to consent in time and wish to port, and other clients are either unable to consent in time or unwilling to port, then no client can port. This means that the failure of one client to consent would automatically prevent the transference of an omnibus account, generating replacement costs for the rest of the clients in an omnibus account. It adds an additional reason why porting might be unsuccessful after a default. The Bank is therefore proposing to amend the provisions that restate article 48(5) of UK EMIR to require CCPs to trigger porting to a pre-agreed, backup clearing member that has been designated by all of the clients in the omnibus account without proactively seeking consent from clients in the porting window (rule 27(1) of the Default Procedures Part). Porting would then take place unless all clients in an account raise an objection with the CCP during the porting window, or the receiving clearing member does not accept the new clients.

15.13. These changes would enable CCPs to create a system where all clients moved by the CCP to a new clearing member without the CCP proactively seeking client consent at the time of the default, though the rule includes a mechanism whereby porting may be prevented if all clients in an account object during the porting window. This removes one choice for clients on the day. However, under such a system, clients would then be able to move to a different clearing member or to liquidate their positions after porting was completed if they did not wish to stay with receiving clearing member. The Bank takes the view that such a system would incentivise clients to place greater emphasis on selecting and agreeing relationships with back up clearing members in business-as-usual conditions.

15.14. The receiving clearing member will still retain the right to not accept ported position if that is allowed for in their contractual agreements with ported clients.

15.15. These changes will be supplemented by a further change to default fund allocations which is outlined in Chapter 16 – Default Fund.

Bank’s objective analysis

15.16. The assessment of the impact of proposals relating to the restatement of the Assimilated Law relating to default procedures on the Bank’s objective is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

15.17. In addition, the Bank considers that the proposed changes set out in this chapter will advance its Financial Stability Objective by improving the likelihood that clients are successfully ported to an alternative clearing member in the scenario of a clearing member default. This will minimise the number of solvent positions that need to be liquidated during a stress, reducing the likelihood that a CCP uses its default fund, putting costs on clearing members during a time of stress. For clients, this ensures continued access to cleared markets, and generally reduce the likelihood of unwarranted market instability as clients would not seek to replace trades in stressed markets. Markets face reduced disruption and greater efficiency when solvent clients’ portfolios can be maintained at CCPs, rather than being liquidated and then re-established by the client purely because the client no longer has access to the CCP.

15.18. The proposed changes to porting would require adaptation by CCPs in a way that we consider would be compatible with our Secondary Innovation Objective. The change to default testing (Proposal 1) is intended to improve financial stability, but may have the effect of identifying inefficiencies in porting processes and therefore encouraging CCPs and clearing members to devise innovative solutions to facilitate porting. UK CCPs could therefore be more effective and efficient by having smoother and more practised porting procedures that reduce costs for end users by limiting the cost of replacing trades in potentially stressed market conditions.

15.19. The change to client consent requirements (Proposal 2) does not engage the Bank’s secondary innovation objective. The Bank is proposing this change as it because an increase in the portability of client positions aids financial stability.

‘Have regards’ analysis

15.20. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to the restatement of Assimilated Law relating to default procedures is set out in Chapter 2 – Restatement of Assimilated Law. In addition, the Bank considers the following factors, to which the Bank is required to ‘have regard’, as significant in shaping the proposals related to porting:

1. Using the Bank’s resources in the most efficient and economical way: The proposal uses Bank resources efficiently. Incentivising industry-led approaches to porting through rule changes allows industry to develop improvements to portability without a substantial step up in supervisory engagement.
2. Differences in the nature and objectives of businesses: The Bank considers that while our CCPs operate in different markets and asset classes, the nature of their businesses is not fundamentally different, and so it is appropriate to set a consistent requirement.
3. Facilitating fair and reasonable access to FMI services: The Bank considers that a greater focus on porting during fire drills will add greater transparency and predictability to how portfolios will be handled in a default, so enabling clients to make more informed decisions about their participation.
4. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: The proposed changes would increase the likelihood of successful porting for non-UK firms clearing in UK CCPs as clients so that they can retain the benefits of clearing and do not face undue loss.

Cost benefit analysis

15.21. The assessment of the costs and benefits associated with proposals to restate Article 48 of UK EMIR, Article 49(2) and related technical standards in Articles 58, 59(12) and 61(2) of CDR 153/2013 are set out in Chapter 2 – Restatement of Assimilated Law. The costs and benefits of the Bank’s proposals related to porting are set out in the following paragraphs.

Costs

15.22. We expect the cost of changing client consent rules to be one of familiarisation with no ongoing cost. We have assessed the cost of transitioning to a new regime: we assume it would take approximately 10 person days to read and also communicate the new policy documentation to clearing members and their clients. This results in an overall one-off roll-out cost of £10,000 per firm.

Benefits

15.23. The benefits to the change on porting are related to, and build on, the benefits of changes to Default Fund rules also intended to incentivise porting. As such, the benefits in this chapter and in Chapter 16 – Default Fund overlap.

15.24. Financial stability benefits: These changes would affect the outcomes of CCP default procedures. When a default occurs, CCPs look to hedge, auction or liquidate the portfolios associated with the defaulting clearing member. All of these actions can generate a loss that needs to be absorbed and introduces greater complexity. Successful porting could result in fewer positions needing to be closed out, therefore reducing the potential losses to CCPs and clearing members that arise from higher costs to close out positions. Additionally, market participants who are willing to bear market risk would be able to remain active and retain access to the CCP. As a result, aiding the portability of client positions, which these proposals aim to do, could increase the resilience of financial markets during stress and bolster financial stability. This is important, as stable, liquid, reliable financial markets underpin economic activity.

15.25. In terms of the scale of the benefits noted, we can broadly estimate the value of porting through data gathered in the Bank’s annual supervisory stress tests for CCPs, which includes consideration of porting. The Bank produces, for relevant stress scenarios, for each clearing service, a result in the case that no porting happens, and the case that all porting happens. The credit stress test (chart 1) estimates the effect of a simultaneous default of the two largest potential defaulting members in terms of stressed losses over defaulting members’ resources (SLOMR).

15.26. This shows a model of the additional amount of pre-funded resources consumed after the defaulting clearing member’s initial margin and default fund contribution is consumed, between a scenario involving the fully successful porting of all client positions against a scenario involving no porting. This number is calculated from the results of the 2024 Bank supervisory credit stress test by the SLOMR outcome for the no porting scenario from the SLOMR outcome in the full porting scenario for different clearing services. For example:

• ICEU F&O: £951 million.
• LCH Swap Clear: £139 million.
• LCH Forex Clear: £162 million.
• LME Base: £712 million.^{footnote [31]}

15.27. Overall, the proposals would create marginal implementation costs and represent potentially significant benefits in the event of a default, particularly if client positions would otherwise be liquidated in stressed market conditions. The Bank judges that the benefits for financial stability, and reduced losses for firms in the aftermath of a clearing member default, outweigh the BAU costs.

Chapter 16: Default Fund

16.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements in the Default Fund Part of the CCP rules, with modifications set out in this chapter. The relevant material within Assimilated Law is set out in Article 42 of UK EMIR and Articles 29 to 31 of CDR 153/2013.

16.2. The policy intent of Article 42 and Article 29 to 31 CDR 153/2013 is to ensure that CCPs have sufficient resources, through a robust default fund arrangement, to manage member defaults under extreme but plausible market conditions. To manage these risks effectively, Article 42 of UK EMIR requires CCPs to maintain a pre-funded default fund to cover losses beyond margin requirements in case of clearing member default (including insolvency) in extreme but plausible market conditions. As part of this, CCPs must establish a minimum size for the default fund and for members’ contributions to it. CCPs must also establish criteria for sizing these contributions, with contributions proportionate to members' exposure levels. Finally, CCPs must develop scenarios of extreme but plausible market conditions.

16.3. Article 29 of CDR 153/2013 requires CCPs to establish an internal policy framework to determine relevant extreme but plausible market conditions and sets out the requisite governance for this framework. Article 30 provides further detail on what the framework should include, while Article 31 contains requirements for the regular review of the framework and the procedures within it.

16.4. The Bank proposes to restate these provisions in a Default Fund Part of the CCP rules, subject to changes set out in the following paragraphs. The proposed Default Fund Part of the CCP rules is set out in Annex 2.

Proposal

16.5. As outlined in Chapter 15 – Default Procedures, porting is the transfer of client positions and collateral from one clearing member to another to ensure the continuity of trading and clearing.

16.6. Porting procedures are set out in Article 48 of UK EMIR, which will be restated in the Default Procedures Part. Chapter 15 provides a more detailed discussion on porting and proposed improvements, including two policy changes aimed at enhancing the portability of client positions. To support these enhancements, the Bank also proposes a policy change within the Default Fund Part to further incentivise porting.

16.7. Article 42(2) of UK EMIR requires CCPs to size default fund contributions relative to the exposure they have to each clearing member’s positions, without factoring in portability. Clearing members with client portfolios that have a higher likelihood of porting can materially help to reduce the overall exposure that a CCP needs to manage during a default. Therefore, the Bank is proposing to specify that the allocation of default fund contributions to a clearing member should consider the portability of the clearing member’s clients. Clearing members’ clients that are less likely to be ported would thus be allocated a higher proportion of default fund contributions. This change would be made as part of rule 2.3(3) of the Default Fund Part. This would act as an incentive for clearing members to make their clients easier to port in a default. For example, CCPs could require higher default fund contributions from clearing members who have clients that have not nominated a back-up clearing member.

16.8. The Bank does not propose to be prescriptive about how CCPs ought to evaluate portability, though the Bank would oversee this as part of regular supervision and may publish supervisory guidance as appropriate.

16.9. This proposed change is aligned with international standards. PFMI 14 states that CCPs should structure their porting arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant’s customers will be transferred to a non-defaulting clearing member. The proposed changes aim to incentivise CCPs to increase the likelihood that CCPs, clearing members and clients are well prepared to port clients’ positions.

Clarificatory changes

16.10. In addition, the Bank is proposing to clarify the group dependencies that should be taken into account when determining the minimum size of the default fund. Article 29 of CDR 153/2013 requires CCPs to determine the minimum size of the default fund and other financial resources taking into account group dependencies. The Bank is proposing to clarify that the group dependencies that should be taken into account are the CCP’s and clearing members’ group dependencies (rule 3.2 of the Default Fund Part).^{footnote [32]} This clarification should support CCPs in understanding the Bank’s requirements but is not expected to represent a material change for CCPs.

Bank’s objective analysis

16.11. The assessment of the impact of proposals to restate Article 42 of UK EMIR and Articles 29 to 31 of CDR 153/2013 on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

16.12. In addition, the Bank considers that the proposed changes set out in this chapter will advance its Financial Stability Objective by improving the likelihood that clients are successfully ported to an alternative clearing member in the scenario of a clearing member default. This will minimise the number of solvent positions that need to be liquidated during a stress, ensure clients can continue accessing cleared markets, and generally reduce the likelihood of unwarranted market instability.

16.13. The proposed changes to porting would require adaptation by CCPs in a way that we consider would be compatible with our Secondary Innovation Objective. The change would create a financial incentive for firms to find innovative solutions to enhance client portability (through training, encouraging their clients to nominate a backup clearing member, or producing templates for porting forms, for example) in a way that would encourage improvements in the quality and economy of clearing services at UK CCPs. UK CCPs could therefore be more efficient by having smoother and more practised porting procedures that reduce costs for end users by limiting the losses to the waterfall of a default.

‘Have regards’ analysis

16.14. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to default funds is set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of proposals set out in this chapter are outlined in the following paragraphs.

16.15. The Bank considers the following factors, to which the Bank is required to ‘have regard’, as significant in shaping these proposals:

1. Using the Bank’s resources in the most efficient and economical way: The proposal uses Bank resources efficiently. Incentivising industry-led approaches to porting through rule changes allows industry to develop improvements to portability without a substantial step up in supervisory engagement.
2. Proportionality: The change to default fund contributions would require CCPs to review, and, if necessary, resource a change to their default fund contribution allocation; we believe this is proportionate given CCPs stand to benefit from a reduction in the risk of losses due to failure of clients to port, and the overall benefit to financial stability.
3. Differences in the nature and objectives of businesses: The Bank considers that while our CCPs operate in different markets and asset classes, the nature of their businesses is not fundamentally different, and so it is appropriate to set a consistent requirement.
4. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: The proposed change would increase the likelihood of successful porting for non-UK firms clearing in UK CCPs as clients so that they can retain the benefits of clearing and do not face replacement costs, minimising disruption in other jurisdictions, benefiting financial stability in the non-UK countries where ported firms are located.

Cost benefit analysis

16.16. The assessment of the costs and benefits associated with proposals to restate Article 42 of UK EMIR and Articles 29 to 31 of CDR 153/2013 are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of the portability proposal are set out in the following paragraphs.

Costs

16.17. Costs for CCPs: There will be an initial cost to firms to implement a change to the allocation of default fund contributions between clearing members. There will also be compliance costs associated with transitioning to as well as cost of creating a new model to adjust default fund allocations. Using the standard cost model our estimates are as follows:

1. Cost of transitioning to a new regime: We assume it would take approximately 10 person days to read and also communicate the new policy documentation to clearing members and their clients. This results in an overall one-off roll-out cost of £10,000 per firm.
2. Cost of designing, seeking approval for, and implementing a new model to adjust default fund allocations, where a firm does not already meet the new requirements. We estimate this as a small, one-off technological project, costed at up to £550,000 per firm in our standard cost model.

16.18. Cost to clearing members and clients: This could result in a change to the contributions of clearing members to a CCP’s default fund. This will not change the overall size of the CCP’s default fund; rather, some clearing members will see their contributions increase and some will see their contributions decrease, creating costs for some firms and benefits for others depending on any steps taken to increase the likelihood of porting client positions.

16.19. This would result in a cost for certain clearing members that might be passed onto clients through lower or higher fees. However, across the population of clearing members, contributions would remain at the same level as the size of the default fund is not being altered by this change.

16.20. The proposed policy may also impact the willingness of clearing members to onboard clients who fail to nominate backup clearing members, or categories of client who are less portable due to posing more onboarding difficulties (such as requiring more complex ‘know your client’ checks).

16.21. Costs to the Bank: The proposals are expected to entail a change to the CCP model and rules used to calculate default fund allocations. We anticipate CCPs will engage with the Bank on the design of these changes and the simplified model change notification process set out in Chapter 21 will apply. We have estimated that this would require three FTE days of Bank resources, resulting in costs to the Bank of around £1200 notification, depending on the level of engagement needed.

Benefits

16.22. The benefits to the change on porting are related to, and build on, the benefits of changes to default procedures also intended to incentivise porting. As such, the benefits in this chapter and in Chapter 15 – Default Procedures overlap.

16.23. In terms of the scale of the benefits noted, we can broadly estimate the value of porting through data gathered in the Bank’s annual supervisory stress tests for CCPs, which includes consideration of porting. The Bank produces, for relevant stress scenarios, for each clearing service, a result in the case that no porting happens, and the case that all porting happens. The credit stress test (chart 1) estimates the effect of a simultaneous default of the two largest potential defaulting members in terms of stressed losses over defaulting members’ resources (SLOMR).

16.24. This shows a model of the additional amount of pre-funded resources consumed after the defaulting clearing member’s initial margin and default fund contribution is consumed, between a scenario involving the fully successful porting of all client positions against a scenario involving no porting. This number is calculated from the results of the 2024 Bank supervisory credit stress test by the SLOMR outcome for the no porting scenario from the SLOMR outcome in the full porting scenario for different clearing services. For example:

• ICEU F&O: £951 million.
• LCH Swap Clear: £139 million.
• LCH Forex Clear: £162 million.
• LME Base: £712 million.^{footnote [33]}

16.25. Overall, implementation of the proposal will incur adaptation costs (though the overall size of the default fund will remain the same) and put an increased burden on members with less portable client portfolios. The benefits would present themselves in stressed markets, and in reduced costs for clearing members with portable client positions. The Bank judges that the benefits for financial stability, and reduced losses for firms in the aftermath of a clearing member default, outweigh the BAU costs.

Chapter 17: Default Waterfall

17.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements relating to the default waterfall in the Default Waterfall Part of the Bank rules, subject to changes set out in this chapter. The relevant Assimilated Law provisions are Articles 43 and 45 of UK EMIR and Articles 35 and 36 of CDR 153/2013.

17.2. The policy intent of Articles 43 and 45 of UK EMIR is to ensure that CCPs have sufficient financial resources to manage clearing member defaults effectively, specifically through the default waterfall mechanism. Article 43 of UK EMIR requires CCPs to maintain sufficient pre-funded available financial resources to cover potential losses. Article 43 of UK EMIR also requires CCPs to maintain sufficient pre-funded resources together with the default fund to withstand the default of at least their two largest clearing members. Articles 35 and 36 of CDR 153/2013 outline how the CCP should calculate, allocate, and maintain these resources to ensure they can swiftly be drawn upon. Article 45 of UK EMIR sets out the hierarchy and order in which the resources contributed by clearing members, and the CCP itself, must be used.

17.3. The Bank proposes to restate these provisions in Bank rules, subject to the changes set out in this chapter. The proposed Default Waterfall Part for the CCP rules is set out in Annex 2.

Proposal 1: Introducing a second tranche of ‘skin in the game’

17.4. The Bank is proposing to introduce a requirement for CCPs to allocate an additional portion of their own resources as a tranche of the default waterfall.

17.5. CCPs are required to maintain a default waterfall establishing the order in which various resources can be used to cover losses arising from the default of a clearing member. A CCP’s own resources are a feature of the waterfall. Under UK EMIR, if a CCP incurs losses due to the default of one or more of its participants, these losses are met first from the margin and contribution to the default fund provided by the defaulting participant(s). In addition, CCPs must allocate a portion of their own resources as a tranche of the default waterfall, commonly referred to as ‘skin in the game’ (SITG) and referred to as ‘dedicated financial resources’ in Bank rules. SITG is used after a defaulter’s resources and before those of the non-defaulting clearing members. If the CCP’s SITG and the defaulter’s resources are exhausted, the CCP may then draw upon non-defaulting participants’ contributions to the default fund, ahead of further recovery and loss allocation resources.

17.6. A CCP’s contribution to the default waterfall is intended to incentivise robust risk management, including the appropriate sizing of pre-funded resources (including initial margin, variation margin, and default fund contributions) available to absorb default losses.

17.7. In February 2021, HMT consulted on expanding the resolution regime for CCPs and empowering the Bank to require CCPs to hold a second tranche of SITG (SSITG, also referred to as ‘further dedicated financial resources’ in the FMI Rulebook). The responses to this consultation were balanced, and HMT committed to ensuring the Bank would be able to implement this policy using its rule-making power. The Bank is therefore proposing to require CCPs to add an additional tranche of SITG (rule 2.2(2) of the Default Waterfall Part). This would place a further tranche of CCPs’ own resources at risk further down the default waterfall and incentivise CCPs to manage default management processes further down the waterfall as efficiently as possible.

17.8. The Bank proposes that SSITG is placed in line with, and would be used pro rata with, the default fund contributions of non-defaulting members in a default loss scenario (rule 3.4 of the Default Waterfall Part). Every incremental loss to the default fund would cause a proportionate loss to the CCP’s SSITG (Figure 4). This provides a further incentive for CCPs to manage member defaults in an orderly and timely manner to ensure losses are minimised, which in turn minimises the use of the default fund and other unfunded resources. The Bank also considers it appropriate that this tranche of resources is available in full to be used against non-default losses, subject to the replenishment criteria outlined in the paragraphs below.

17.9. The Bank proposes that the size of SSITG should be 25% of the CCP’s risk-weighted capital requirement. This is the same size as the existing requirement for the first tranche of SITG (rule 2.4 of the Default Waterfall Part). The Bank considers that this methodology is operationally appropriate because it takes into account a number of elements of a CCP’s risk profile. UK CCPs size their regulatory capital after considering various risks to their business, including the risk of needing to wind down or restructure, operational and legal risks, business risk, and any credit, counterparty credit or market risks that are not covered by the default waterfall. Together, these calculations ensure that CCPs are capitalised against the different types of risk resulting from their specific operations, legal context and risks associated with the markets they offer services in, and ensures they are capitalised at a level that is proportionate to these risks. Sizing SSITG using a consistent metric as the anchor ensures that this tranche of resources will also be proportionate to the CCP’s risk profile. Furthermore, it results in an amount that is material enough to provide a robust incentive, while avoiding excessively increasing the costs of clearing. The size of SSITG should therefore be well calibrated. Further detail on these considerations is set out in the cost-benefit analysis.

17.10. The Bank considers that CCPs should calculate SSITG at the level of the CCP and then allocate it across its clearing services proportionately to the size of each service’s default fund. The Bank proposes that CCPs should hold SSITG as capital including retained earnings and reserves. The Bank also proposes that the CCP should inform the Bank if SSITG falls below the required amount. Finally, the Bank proposes that CCPs should be required to replenish SSITG within one month of its usage and after replenishing the first tranche of SITG, and that only the residual amount of the allocated second tranche is required to be used if there is a subsequent default before replenishment. These proposals are in line with the requirements for SITG. We are not proposing any other substantive changes to the default waterfall. These proposals are set out in rules 2.6–2.11 of the Default Waterfall Part.

17.11. The Bank is proposing that this policy is implemented with a phased approach (rule 2.4(2) of the Default Waterfall Part). This would mean allowing CCPs to build up to the required level of capital over a period of two years.

Proposal 2: Clarificatory and minor changes

17.12. Additionally, the Bank is proposing a set of clarificatory changes to default waterfall requirements. These changes are outlined in the following paragraphs.

17.13. The Bank proposes to reorder and clarify a number of provisions of Articles 43 and 45 of UK EMIR and Articles 35 and 36 of CDR 153/2013 to reflect the introduction of SSITG and the use of the terms ‘dedicated financial resources’ and ‘further dedicated financial resources’ (for example, rule 2.4 of the Default Waterfall Part). This also includes grouping the provisions in Article 35 of CDR 153/2013 related to balance sheet treatment of SITG and SSITG (rule 2.3 of the Default Waterfall Part). Article 43(2) of UK EMIR requires that the default fund and the other financial resources must enable the CCP to withstand the default of at least the two clearing members to which it has the largest exposures under extreme but plausible market conditions. The Bank proposes to specify that the extreme but plausible market conditions should be based on the scenarios developed by the CCP in accordance with rule 2.5 of the Default Fund Part (rule 2.1 of the Default Waterfall Part). This aims to ensure that the link between these provisions is clear.

17.14. Article 43(3) of UK EMIR states that a CCP may require non-defaulting clearing members to provide additional funds in the event of a default of another clearing member. To support transparency, the Bank proposes to reiterate in clearer language that the additional funds a CCP may require non-defaulting clearing members to provide must be capped (rule 3.5 of the Default Waterfall Part). The Bank also proposes to modify the requirement to clarify that CCPs must include a provision in their rules allowing them to require non-defaulting clearing members to provide these additional funds.

17.15. Article 45 of UK EMIR sets out in what order the default waterfall should be used. The Bank proposes amendments to provide greater clarity on the order in which contributions should be used and the losses that are covered (rules 3.1–3.4, 3.6 of the Default Waterfall Part).

17.16. The changes to Article 29 of CDR 153/2013, clarify that the framework used to determine the minimum size of necessary financial resources should take into account the CCP’s and clearing members’ group dependencies (rule 3.2 of the Default Fund Part). This also applies to Chapter 2 of the Default Waterfall Part.

Bank’s objective analysis

17.17. The assessment of the impact of proposals to restate Articles 43 and 45 of UK EMIR and Articles 35 and 36 of CDR 153/2013 on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

17.18. The clarificatory changes referred to above support the Bank’s Financial Stability Objective by increasing transparency around these provisions, which in turn supports effective risk management by the CCP. In addition, the Bank considers that the proposal to introduce SSITG will advance its Financial Stability Objective by ensuring that CCPs have clear and robust incentives for effective risk management further down the default waterfall in a default loss event. The Bank’s proposal for CCPs to provide a SSITG adjacent to the mutualised default fund would create an incentive for CCPs to minimise default waterfall losses for non-defaulting members and would help to further align incentives between CCPs and their clearing members. By doing so, the policy aims to lessen contagion risks in a default event and thus reduce stress in the wider financial system.

17.19. When there is a default at a CCP, there is potential for those losses to cascade through the system as they become mutualised. Members may need to either contribute more through their unfunded exposures (powers of assessment) or through replenishing the CCP’s mutualised default fund. Both of those situations could exacerbate stress in the market as liquidity needs increase throughout the system. Placing CCP capital at risk would incentivise stronger default management, mitigating risks to financial stability.

17.20. As outlined above, this proposal is primarily intended to reduce risks to financial stability by enhancing the default management process of CCPs. The Bank has further considered this policy proposal in the context of its Secondary Innovation Objective. While increasing the resources CCPs need to commit to the default waterfall could result in fewer resources being available to invest in innovative projects, the Bank considers that the benefits to financial stability justify the proposed changes.

‘Have regards’ analysis

17.21. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to the proposals to restate Articles 43 and 45 of UK EMIR and Articles 35 and 36 of CDR 153/2013 is set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of the clarificatory changes referred to above and the proposal to introduce SSITG are set out in the following paragraphs.

1. Proportionality: The Bank considers that the costs associated with this proposal to introduce SSITG are proportionate to the financial stability benefits. The Bank considered whether to set the SSITG percentage for each firm individually via an analysis of the firms’ own risk profile but concluded that this would pose additional complexity and would risk introducing spurious accuracy given that CCP capital requirements are already sensitive to the specific risks faced by the CCP. The extra costs of implementing and monitoring an additional specific requirement would also require more resources from both the CCPs and the Bank. Therefore, the Bank considers it proportionate to set a consistent requirement across CCPs to set SSITG at 25%, in line with SITG. Every incremental loss to the default fund would cause a proportionate loss to the CCP’s SSITG, which provides incentives for effective risk management further down the default waterfall in a default loss event.
2. Sustainable growth: The Bank considers that the proposal to introduce SSITG will reduce the likelihood of future crises, and therefore support sustainable growth, through its effect on enhancing incentives to minimise losses and reducing contagion risks in a default scenario, thereby reducing stress in the wider financial system. The Bank has also considered that this policy will not adversely affect the Secretary of State’s ability to comply with targets set out in section 1 of the Climate Change Act 2008 or section 5 of the Environment Act 2021.
3. Differences in the nature and objectives of businesses: The Bank considers that while UK CCPs operate in different markets and asset classes, the nature of their businesses is not fundamentally different, and so it is appropriate to set a consistent requirement for SSITG. This will provide greater clarity and predictability for firms.
4. Transparency: The Bank considers that the proposed re-ordering of rules and clarifications of the requirements, particularly in relation to non-defaulting members, will enhance the transparency of its expectations regarding the default waterfall.
5. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: The proposal to introduce SSITG could have a positive effect on the financial stability of countries where members of UK CCPs are located. By aligning CCP and member incentives more closely, the proposal incentivises CCPs to act in a way that benefits the wider system, including the global financial system, such as by reducing the risk of contagion.

Cost benefit analysis

17.22. The assessment of the costs and benefits associated with the proposals to restate Articles 43 and 45 of UK EMIR and Articles 35 and 36 of CDR 153/2013 are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of specific proposals are set out in the following paragraphs.

Costs

17.23. Costs to CCPs: The most direct cost that would arise from the proposal to introduce SSITG would be the additional capital that CCPs are expected to place in the default waterfall as their SSITG contribution. This policy could therefore raise the cost of capital for CCPs, and mean they are unable to invest that money in other areas of the business, creating an opportunity cost for the firm that could impact its growth. The Bank estimates that the yearly incremental capital cost to comply with this policy, and therefore the opportunity cost, for UK CCPs will be in the range of £300,000 to £1,230,000.^{footnote [34]} This could be mitigated by the fact that the CCP would be able to hold this contribution as an interest-bearing asset, similar to the first skin in the game. Further, the Bank considers that given the size and scope of the operations of UK CCPs, these costs would have a limited impact on the medium-term economic output of the CCP and would not result in any material consequences to the markets they operate in.

17.24. CCPs would also face compliance costs to implement and monitor their own compliance with the new policy; although CCPs must monitor their compliance with the existing SITG policy, which is similarly calibrated. Using a set of assumptions to calibrate the changes firms would need to make to implement this change, we estimate that CCPs would face approximately £620,000 per firm in one-off implementation costs, which includes any technological changes required at the firm, and then an ongoing annual cost of approximately £14,000 per firm.^{footnote [35]}

17.25. The Bank is proposing to phase in this requirement over a period of two years, which means that while the implementation costs will be incurred upon enactment of the rules, the capital cost to comply with the policy will be less onerous in the first year and CCPs will be able to develop a plan to raise any additional capital to meet the requirement, if needed.

17.26. Costs to clearing members and clients: There should be no direct costs to the clearing members as the proposed policy does not attach any further costs or requirements onto them. There could, however, be indirect costs as CCPs could choose to pass on the extra costs they face to their customers, such as in the form of higher costs to using the CCPs clearing services.

17.27. Costs to the Bank: We do not expect any additional costs to be borne by the Bank, as monitoring compliance would be captured within the Bank’s existing supervisory activity.

Benefits

17.28. Financial stability benefit: Implementing this policy proposal will enhance incentives for the CCPs to mitigate the risk of contagion from default losses by increasing preparedness through more robust default management procedures. Incentivising CCPs to place a greater emphasis on these procedures by ensuring more of their resources are at risk alongside their members could reduce the losses that need to be absorbed by the CCP’s members via the default waterfall.

17.29. The mechanism through which this benefit could arise is by ensuring CCPs have a clear continuous incentive to focus on mitigating losses, even once the first tranche of SITG default fund has been breached. The proposed policy approach creates a scenario where every incremental loss to the default fund would cause a proportionate loss to the CCP’s SSITG, furthering the incentive to ensure losses are minimised. This can be visualised using a stylised CCP default waterfall, as modelled below. The graph shows how once the losses from a default begin to use resources from the mutualised default fund, the CCP’s resources are used at the same rate, as shown by the line associated with the third element of the waterfall.

17.30. We have seen a limited set of historical examples that can illustrate the potential benefits of this policy. One was in 2018, where an individual trader defaulted at Nasdaq Clearing, a Swedish CCP. In total, this event caused losses to the CCP’s pre-funded resources of up to €114 million – which included €7 million from Nasdaq’s SITG.^{footnote [36]} Finansinspektionen, the Swedish Financial Services regulator, conducted an investigation into Nasdaq’s handling of the default and found issues with how the event was handled. The ruling says that ‘by not closing out the positions in derivative contracts promptly enough, Nasdaq Clearing exposed the operations and its members to an unacceptable risk that increased over time[…]’.^{footnote [37]}

17.31. These conclusions highlight the importance of CCPs having robust default management procedures, and the Bank considers it important that the proposed SSITG policy incentivises CCPs to act in a way that enhances the effectiveness of the default management procedures.

17.32. One way this incentive could manifest itself would be for CCPs to design default management procedures in a way that incentivises more robust auctions as well as efficient and prompt hedging of exposures that could lead to fewer losses needing to be absorbed via the default fund. This policy would enhance the CCP’s incentives to mitigate risks that the pre-funded resources they hold are not exhausted, benefiting financial stability as members would need to contribute fewer resources to replenish the CCP’s pre-funded waterfall, or contribute further amounts through the recovery loss allocation tools.

17.33. Benefits to clearing members: Clearing members will see a marginal benefit to their capital charges against their exposures to the CCP as the SSITG would be deducted from the overall level of exposures. The scale of this effect would be different for every clearing member, and it is not possible for the Bank to estimate the scale of the impact on individual clearing members.

17.34. The Bank also considers that the proposal to allow SSITG to be used in the event of a non-default event would provide benefits to clearing members. After experiencing certain types of non-default losses (NDLs), the CCP needs to ensure it is able to remain operational and viable, which ensures continued access to the CCP for clearing members. Ensuring that the CCP is able to use this additional tranche of financial resources to absorb those losses could help maintain the continuity of critical clearing services that members depend on.

17.35. The Bank considers that the benefits of this policy will outweigh the costs. The behavioural changes incentivised by this policy would support the Bank’s objective to protect and enhance UK financial stability as they are expected to increase incentives for UK CCPs to focus on their role in ensuring defaults are managed smoothly and in a way that minimises the losses that need to be absorbed by their membership, which is made up of firms also participating in the rest of the financial system. The Bank considers that the costs incurred by CCPs’ implementing this policy and holding an additional tranche of capital are proportionate, and the Bank has aimed to design this policy in a way that minimises the compliance and monitoring costs for CCPs. The phased implementation of the policy will also help ensure that the costs incurred are spread over a longer timeframe, mitigating the immediate impact on CCPs.

Chapter 18: Liquidity Risk Controls

18.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements related to liquidity risk controls in the Liquidity Risk Controls Part of the CCP rules, subject to the changes set out in this chapter. The relevant material in Assimilated Law is set out in Article 44 of UK EMIR as well as Articles 32–34, 54 and 59(6) of CDR 153/2013, which relate to stress testing requirements set out in Article 49 of UK EMIR.

18.2. CCPs must have liquid resources to manage a default. If a clearing member defaults, CCPs must continue to make margin payments to other clearing members. Liquidity risk arises when a potentially substantial demand for cash, such as in a default management scenario, cannot be met when it is due, or can only be met at unexpectedly high cost. This creates a risk to a CCP which, if not well managed, can induce substantial stress in the market.

18.3. UK EMIR sets standards for CCPs in terms of how to assess the adequacy of liquid resources. Article 44(1) of UK EMIR requires a CCP to have access at all times to adequate liquidity to perform its services and activities and measure, on a daily basis, its potential liquidity needs. This must take into account the liquidity risk generated by the default of at least the two clearing members to which the CCP has the largest liquidity exposures under extreme but plausible market conditions (known as ‘Liquidity Cover 2’). The Liquidity Cover 2 requirement was introduced to ensure that CCPs have liquidity resources to manage multiple failures in the market, reducing the potential for contagion.

18.4. Articles 32 to 34 of CDR 153/2013 requires CCPs to address the liquidity needs arising from their relationships with any entity to which they have a liquidity exposure. In practical terms, this means that when conducting stress tests, a CCP must default the two entities with highest potential exposures to the CCP, regardless of whether they are clearing members or perform other functions. This may include a liquidity provider, an interoperable CCP or another entity to which the CCP has a significant potential exposure. CDR 153/2013 Articles 54 and 59(6) set out liquidity risk stress testing requirements for CCPs to ensure that they have sufficient liquid financial resources to settle payment obligations.

18.5. The ESMA Opinion on CCP liquidity risk assessment provides further clarity on how CCPs should assess their liquidity needs. This Opinion has formed part of the Banks supervisory expectations on firms since the UK’s withdrawal from the EU. It states at paragraph 15 that when a firm acts as both a clearing member and in another capacity towards which the CCP has a liquidity exposure, each of these capacities must be taken into account. The Opinion also clarifies that when determining Liquidity Cover 2 CCPs should test the default of every pair of clearing members acting in all their different capacities vis-à-vis the CCP and select the pair that corresponds to the largest exposure. This is to ensure that CCPs appropriately assess and manage their liquidity risks, and particularly their exposures to clearing members.

18.6. The Bank proposes to restate the content of Article 44(1) of UK EMIR as well as Articles 32 to 34, 54 and 59(6) of CDR 153/2013 in Bank rules, subject to changes listed below. The proposed Liquidity Risk Controls Part for the Bank’s rulebook is set out in Annex 2.

Proposal

18.7. To clarify how CCPs should assess their liquidity needs, the Bank propose to incorporate elements of the ESMA Opinion on Liquidity Risk Assessment from guidance into requirements by integrating paragraphs 15 and 16 of the Opinion into Bank rules:

When a firm acts as both a clearing member and in another capacity towards which the CCP has a liquidity exposure, the CCP must take each of these capacities into account (paragraph 15 of ESMA Opinion);

CCPs must test the default of every pair of clearing members acting in all their different capacities vis-à-vis the CCP and select the pair that corresponds to the largest exposure (paragraph 15(b) and (c) of the ESMA Opinion).

18.8. The remainder of the ESMA Opinion remains a guide for firms to interpret the Bank’s proposed rules and continues to form part of its supervisory expectations.

18.9. Incorporating the elements of the ESMA Opinion in Bank rules would constitute a change in their status since Bank rules are binding regulatory requirements. The Bank considers that these requirements would contribute to ensuring that CCPs accurately assess the liquidity risks to which they are exposed and thus are able to manage them appropriately. As the ESMA Opinion is already a well-established part of UK CCPs’ current practices and the Bank’s supervisory expectations on firms, the Bank expects that incorporating it into requirements will not create a regulatory burden for CCPs.

18.10. Furthermore, the Bank considers that the current framework for liquidity risk controls has been and continues to be a proportionate accounting of the risks CCPs face. It covers all clearing members, and all entities in groups with defaulting clearing members whether they are clearing members or not, in all capacities relevant to liquidity risk. The rules will require firms to account for their liquidity exposures to non-clearing members, and Bank supervision ensures firms do so (rule 3.8 of the Liquidity Risk Controls Part). In addition, the Bank has powers to impose requirements if necessary to ensure robust liquidity management.^{footnote [38]}

The Bank’s objectives

18.11. The assessment of the impact of proposals to restate Article 44(1) of UK EMIR as well as Articles 32–34, 54 and 59(6) of CDR 153/2013 with no material policy change on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

18.12. The Bank considers that enhancing its liquidity risk requirements in line with the ESMA Opinion will advance the Financial Stability Objective as they apply a more robust standard to CCPs’ liquidity risk management.

18.13. The proposals to enhance liquidity risk requirements are also consistent with the Secondary Innovation Objective. This is because they will increase the clarity and transparency of the regulatory requirements for CCPs by ensuring that CCPs accurately assess the liquidity risks to which they are exposed and thus are able to manage them appropriately. The elements of ESMA’s Opinion on liquidity risk assessment that we intend to integrate are outcome-focused and do not prescribe a particular solution, giving CCPs flexibility on how to implement them.

‘Have regards’ analysis

18.14. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to liquidity risk controls proposals is set out in Chapter 2 – Restatement of Assimilated Law.

Cost and benefit analysis

18.15. The costs and benefits of the proposals to restate requirements related to liquidity risk controls into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law. The costs and benefits of the Bank’s proposal to incorporate the elements of the ESMA opinion into Bank rules are outlined below.

18.16. The Bank considers that there will be minimal material costs for firms arising from proposes to incorporate the elements of the ESMA Opinion on liquidity risk assessment. While there will be a change in the status of parts of the ESMA Opinion, which would become part of Bank rules, this has already been widely adopted by CCPs subject to UK regulation.

Chapter 19: Collateral

19.1. This chapter sets out the Bank’s proposals to incorporate UK EMIR collateral requirements in the Collateral Part of the Bank’s rules, with minor modifications. The relevant material within Assimilated Law is set out in Article 46 of UK EMIR, Articles 37 to 42 of CDR 153/2013 and Annex I to CDR 153/2013. Relevant provisions which the Bank is proposing to restate with changes are discussed below.

19.2. Article 46 of UK EMIR sets out requirements for CCPs regarding the collateral they can accept to manage their exposure to clearing members. CCPs must only accept highly liquid collateral with minimal credit and market risk, along with appropriate haircuts to asset values to account for potential declines in value and liquidation timelines. CCPs must also consider liquidity and concentration risks when determining acceptable collateral. CDR 153/2013 provides additional detail and conditions on what qualifies as highly liquid collateral, along with the requirements for valuing collateral, applying haircuts to its value and setting concentration limits to ensure that the collateral remains sufficiently diversified and can be liquidated without a significant market impact.

19.3. The Bank proposes to restate Article 46 of UK EMIR and the associated provisions in CDR 153/2013 in its rules, subject to modifications set out in the following paragraphs. The proposed Collateral Part for the CCP rules is set out in Annex 2.

19.4. Article 40 of CDR 153/2013 requires CCPs to mark-to-market their collateral on a near to real time basis and, where not possible, CCPs must be able to demonstrate to the Bank that they are able to manage the related risks. The Bank proposes to remove the requirement that a CCP must be able to demonstrate to the Bank that it is able to able to manage such risks (rule 8.3 of the Collateral Part). The Bank will continue to have the power to request necessary information to check compliance with its rules and require CCPs to make changes to their approach).

19.5. Article 42(4) of CDR 153/2013 provides further detail regarding concentration limits that CCPs must set to ensure that the collateral remains sufficiently diversified. Specifically, this provision requires CCPs to ensure that no more than 10% of its collateral is guaranteed by a single credit institution or equivalent third country financial institution, or by an entity that is part of the same group as the credit institution or third country financial institution. The Bank proposes to replace the term ‘equivalent third country institution’ with ‘a single financial institution that is based in a country or territory other than the UK in rules (rule 10.4 (1) of the Collateral Part). The purpose of this change is to enhance the clarity of the existing provision, ensuring a more precise interpretation while maintaining the original policy intent.

19.6. Article 42(5) of CDR 153/2013 states that the concentration limits do not apply to collateral held by CCPs in excess of the minimum requirements for margins, default fund or other financial resources. The Bank proposes to replace the term ‘margins’ with ‘initial margin’ in its rules (rule 10.5 of the Collateral Part). The proposed change aims to clarify that the requirement does not apply to variation margin as the variation margin is passed on to clearing members and not retained by CCPs. The Bank therefore considers it more appropriate for this term to refer specifically to initial margin. This change is intended solely for clarification and does not alter the underlying policy objective.

19.7. Annex 1 of CDR 153/2013 outlines the requirements for what may be considered highly liquid collateral. In Section 1 paragraph (c) of Annex 1 CCPs must be able to demonstrate to the Bank, based on an appropriate internal assessment, that the financial instruments that are posted as collateral have a low market risk based on an adequate internal assessment by the CCP. Under paragraph (a), a similar obligation to conduct an internal assessment on credit risk of the issuer must also be carried out. The assessment must not fully rely on external opinions and take into account risks arising from the establishment of an issuer in a particular country. The CCP is then required to be able to demonstrate the low credit and market risk to the Bank. The Bank proposes to remove this demonstration requirement by the CCP (rule 4.1.(2) of the Collateral Part). This change reflects the fact that CCPs must obtain the Bank’s permission as set out in Chapter 21 before making any modifications to the type of collateral they use. By eliminating this reference, the wording more clearly aligns with the established approval process, ensuring that CCPs understand their obligation to seek formal permission rather than simply demonstrating compliance.

19.8. Annex 1 Section 1 of CDR 153/2013 states that highly liquid collateral in the form of financial instruments must be financial instruments meeting the conditions provided for in point 1 of Annex II of CDR 153/2013 or transferable securities and money-market instruments which meet the conditions set out in Section 1. The Bank is proposing to define the term ‘transferable securities’ in line with the definition set out in UK MiFIR. This is a clarificatory change that aligns with how this term is currently interpreted and it does not aim to alter the underlying policy intent.

19.9. Annex 1 Section 1 paragraph (c) of CDR 153/2013 sets out criteria that highly liquid financial instruments must meet to be considered as eligible collateral. One of the criteria is that financial instruments must be denominated in a currency the risk of which the CCP can demonstrate to the Bank that it is able to manage. The Bank proposes to retain this condition in Bank rules and remove the requirement of ‘being able’ to demonstrate (rule 3.1. of the Collateral Part). The change to collateral currency would be captured through the Bank’s supervisory processes as set out in Chapter 21 and CCPs would be required to seek permission to make this change.

19.10. Annex 1, Section 2 of CDR 153/2013 outlines the conditions that a commercial bank guarantee must meet to be considered eligible collateral by CCPs. It also requires CCPs to establish concentration limits in agreement with the Bank. The Bank proposes to delete the requirement that commercial bank guarantees are ‘subject to limits agreed with the competent authority’ in rules (rule 5.1. of the Collateral Part). Bank guarantees need to be fully backed by cash, making them functionally equivalent to cash. Requiring CCPs to continue to agree limits with the Bank would result in ongoing administrative burdens, causing inefficiencies without enhancing CCP risk management.

19.11. Under Annex 1, Section 2 of CDR 153/2013, one of the conditions for a commercial bank guarantee to be considered as eligible collateral is that it must be issued by an entity that the CCPs can demonstrate to the Bank has low credit risk based on an adequate internal assessment conducted by the CCP. The Bank proposes to retain these conditions in Bank rules and remove the requirement of being able to demonstrate the low credit risk to the Bank (rule 5.1. of the Collateral Part). The Bank will continue to have the power to request necessary information to check compliance with its rules and require CCPs to make changes when required.

19.12. Annex 1 Section 3 of CDR 153/2013 sets out conditions that gold must meet to be considered as eligible collateral. One of the conditions is that gold must be deposited with an authorised credit institution or a third country credit institution that enables the CCPs prompt access to the gold when required and the CCP can demonstrate to the Bank that it has low credit risk based upon an adequate internal assessment conducted by the CCP. The Bank proposes to retain these conditions in its rules and remove references to ‘demonstrate to [the Bank] that [the relevant] credit institution has a low credit risk’ (rule 7.1. of the Collateral Part). CCPs would continue to be required to conduct an internal assessment of the credit risk of the credit institution where they intend to deposit gold.

19.13. Annex 1, Section 3 of CDR 153/2013 requires CCPs to deposit gold with an authorised credit institution as defined under Directive 2006/48/EC. The Bank is proposing to replace, in its rules, ‘an authorised credit institution as defined under Directive 2006/48/EC’ with ‘an authorised UK credit institution (rule 7.1(3). of the Collateral Part as defined in the Glossary). The Bank is proposing to define the term ‘authorised UK credit institution’ as a credit institution that is a PRA-authorised person within the meaning given in section 2B(5) of FSMA. This clarificatory change aims to update the legal reference. CCPs would still be allowed to deposit gold in a third-country credit institution if the conditions set out in Bank rules are met.

19.14. Annex 1, Section 3 of CDR 153/2013 requires that if CCPs deposit gold with a third country credit institution, the credit institution must be subject to and comply with prudential rules considered by the Bank to be at least as stringent as those laid down in Directive 2006/48/EC. The Bank proposes to replace references to assimilated legislation with ‘authorised overseas credit institutions’ (rule 7.1. (4) of the Collateral Part, as defined in the Glossary). The Bank is proposing to define the term ‘authorised overseas credit institution’ as meaning a person that is authorised to carry on the business of a credit institution in a country or territory other than the UK. This modification is intended to ensure that CCPs carry out their own assessments to confirm that third-country credit institutions adhere to rules equivalent to those applied to UK credit institutions.

19.15. Additionally, the Bank is inviting views on whether CCPs should be allowed to accept additional types of instruments as eligible collateral, including uncollateralised bank guarantees. Further details are set out in Chapter 26.

The Bank’s objectives

19.16. The assessment of the impact of proposals to restate Article 46 of UK EMIR, Articles 37 to 42 of CDR 153/2013 and Annex I to CDR 153/2013 with no policy change on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

19.17. The removal of the requirement that commercial bank guarantees as collateral are ‘subject to limits agreed with the Bank’ would advance the Bank’s secondary innovation objective by fostering a more flexible and adaptive regulatory framework that supports market efficiency. This change aims to streamline administrative processes, freeing up CCP resources that can instead be directed towards developing innovative solutions.

‘Have regards’ analysis

19.18. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to collateral requirements are set out in Chapter 2 – Restatement of Assimilated Law. In addition, the following factors were significant in the Bank’s analysis of its proposal to the removal of the requirement that commercial bank guarantees as collateral are ‘subject to limits agreed with the Bank’:

1. Using the Bank’s resources in the most efficient and economical way: By eliminating the need for individual limit approvals, the Bank can allocate its resources more efficiently, focusing on supervisory areas where we identified significant risks. This approach would ensure that attention is directed towards high-risk concerns rather than areas where risk is low due to established clear and objective standards for firms.
2. Proportionality: In line with the principle of proportionality, the Bank intends to focus its oversight on areas that pose higher risk to financial stability, ensuring that its regulatory approach remains balanced and targeted. Reducing the number of areas where CCPs must seek approval aims to reduce unnecessary burdens on lower-risk areas. At the same time, CCPs gain greater flexibility in managing their collateral arrangements without the additional layer of administrative procedure.

Cost benefit analysis

19.19. The assessment of the costs and benefits associated with proposals to restate Article 46 of UK EMIR, Articles 37 to 42 of CDR 153/2013 and Annex I to CDR 153/2013 are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of the proposals to remove the requirement that commercial bank guarantees as collateral are ‘subject to limits agreed with the Bank’ are set out in the following paragraph.

19.20. The Bank considers that the removal of the requirement that commercial bank guarantees as collateral be ‘subject to limits agreed with the Bank’ would alleviate administrative burdens on CCPs by removing the need for case-by-case approvals or predefined limits, streamlining processes, and allowing greater flexibility in managing collateral. By eliminating this condition, CCPs can operate more efficiently while still adhering to overarching risk management principles.

Question: Do you have any comments on the Bank’s proposals relating to collateral requirements?

Chapter 20: Investment Policy

20.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements related to CCP investment policy in the Investment Policy Part of the Bank rules, with minor modifications described in this chapter. The relevant Assimilated Law provisions are set out in Article 47 of UK EMIR and Articles 43 to 45 and Annex II of CDR 153/2013. The Investment Policy Part for the CCP rules is set out in Annex 2.

20.2. Article 47 of UK EMIR outlines requirements for a CCP to invest financial resources in cash or highly liquid financial instruments with minimal market and credit risk. These investments must be capable of rapid liquidation with minimal adverse price effects. A CCP must not invest financial resources in its own securities or those of other group members. Financial instruments posted as margin or default fund contributions must be deposited either with operators of securities settlement systems that ensure the full protection of those financial instruments or under other highly secured arrangements. Cash must be deposited with authorised financial institutions using highly secured arrangements or with central banks. Where a CCP deposits assets with a third party, it must ensure that the assets belonging to clearing members are identifiable separately from the assets belonging to the CCP. Finally, Article 47 requires a CCP to take into account its overall credit risk exposures to individual obligors and to ensure that its overall risk exposure to any individual obligor remains within acceptable concentration limits.

20.3. Article 43 and Annex II of CDR 153/2013 specify criteria for highly liquid financial instruments to be considered eligible investments for CCPs. Under these criteria, CCPs must apply restrictive standards concerning the issuer of the financial instrument, the transferability of the financial instrument and the credit, market, volatility and foreign exchange risk of the financial instrument. Article 43 states that debt instruments can be considered highly liquid, bearing minimal credit and market risk if they are debt instruments meeting conditions specified in Annex II of CDR 153/2013, while Annex II additionally states that derivatives contracts can also be considered highly liquid financial instruments if they are used for specific purposes and meet certain conditions.

20.4. Article 44 of CDR 153/2013 specifies requirements for highly secured arrangements for the deposit of financial instruments. If a CCP cannot deposit these instruments with a securities settlement system operator, they must be deposited with a central bank, an authorised credit institution, or a third country financial institution that ensures the full protection and segregation of the instruments, enabling prompt access when required.

20.5. Article 45 of CDR 153/2013 specifies requirements for highly secured arrangements for maintaining cash. It specifies that, where a CCP deposits cash other than with a central bank, the deposit must be with an authorised credit institution, or a third-country financial institution that it can demonstrate has low credit risk.

20.6. (The second) Article 45 of CDR 153/2013 specifies concentration limits for a CCP’s investments (labelling of two articles as Article 45 is a numbering error in the regulation). This requires a CCP to set concentration limits at the level of individual financial instruments, types of financial instruments, individual issuers, types of issuers and counterparties with which financial instruments or cash are deposited, ensuring that CCPs maintain a balanced and diversified portfolio to mitigate risk.

20.7. By setting stringent criteria for acceptable investments and the deposit of cash and financial instruments with third parties, Article 47 of UK EMIR and the above provisions of CDR 153/2013 aim to enhance the resilience of CCPs against market volatility and ensure that resources available to protect against losses on a clearing member default are protected, safeguarding the financial system.

20.8. The Bank proposes to restate the content of Article 47 of UK EMIR and Articles 43 to 45 and Annex II of CDR 153/2013 in Bank rules with minor changes described in this chapter. This would ensure that CCPs will continue to be subject to provisions on investment policy as outlined in the current UK EMIR and CDR 153/2013.

20.9. There are a number of areas contained within the investment policy rules where the Bank has chosen to restate the rules with minor changes. The proposed changes are outlined in the following paragraphs.

20.10. UK EMIR Article 47(2) requires that CCPs’ capital, including retained earnings and reserves, that are not invested in highly liquid financial instruments with minimal market and credit risk, must not be taken into account in relation to certain capital requirements and default fund contributions. The Bank is proposing to include a cross reference to the Default Waterfall Part in the CCP rules that replicate this provision, which includes the ‘Second Skin in the Game’ proposal requiring CCPs to add a new tranche in the default waterfall, as described in Chapter 17 (rule 2.2 of the Investment Policy Part). This is to ensure consistency with the Second Skin in the Game proposal.

20.11. UK EMIR Article 47(3) requires that financial instruments posted as margins or default fund contributions must, where possible, be deposited with operators of securities settlement systems that ensure full protection of those instruments. The Bank is proposing to update this provision to clarify that this requirement applies to margins and default fund contributions both by way of title transfer and security interest and to contributions to other financial resources (rule 2.3 of the Investment Policy Part). Contributions to other financial resources includes parts of the default waterfall outside of initial margin and default fund contributions, including both tranches of Skin in the Game (referred to as ‘dedicated financial resources’ and ‘further dedicated financial resources’ in Bank rules), as well as other collateral that members may post to the CCP (for example, excess collateral). This requirement is currently suggested by CDR 153/2013 Article 44(1) and the Bank therefore views stating this clearly as clarificatory.

20.12. CDR 153/2013 Article 43 states that debt instruments can be considered highly liquid, bearing minimal credit and market risk if they are debt instruments meeting conditions specified in Annex II. This Annex specifies that derivative contracts can also be considered highly liquid financial investments, bearing minimal credit and market risk, for specific usages and subject to certain conditions. To align these provisions, the Bank is proposing to add a reference to derivative contracts in the CCP rules that replace Article 43 (rule 3.1 of the Investment Policy Part) to clarify that derivative contracts can also be considered highly liquid financial instruments if they meet the conditions set out in the Annex of that Part.

20.13. CDR 153/2013 Article 44(1)(b) and Article 45(1)(b)(i) state that if a CCP is unable to deposit financial instruments with the operator of a securities settlement system or cash with a central bank, then the CCP can deposit these at an authorised credit institution if it meets certain conditions. Although the definition of a credit institution is currently not jurisdiction specific, the Bank considers that the intention of the provision was to refer to UK credit institutions. The Bank is therefore proposing to replace references to ‘authorised credit institution’ with ‘authorised UK credit institution’ (rule 4.1(2) of the Investment Policy Part). The Bank is proposing to define the term ‘authorised UK credit institution’ as a credit institution that is a PRA-authorised person within the meaning given in section 2B(5) of FSMA.

20.14. CDR 153/2013 Article 44(1) and (1)(c) states that if a CCP is unable to deposit financial instruments with the operator of a securities settlement system, then the CCP can deposit these at a third country financial institution meeting certain conditions. These conditions include that the CCP can demonstrate through internal assessment that the institution has robust accounting practices, safekeeping procedures and internal controls, which is a condition additional to those specified in Article 44(1)(b). The Bank considers that the intention of the provision was to refer to overseas deposit takers and certain overseas financial institutions (such as custodian entities), and that these institutions should be authorised. The Bank is therefore proposing to replace reference to ‘third country financial institution’ only with reference to an ‘authorised overseas credit institution’ or an ‘authorised overseas financial institution’ (rule 4.1(3) of the Investment Policy Part). The Bank is proposing to define the term ‘authorised overseas credit institution’ as meaning a person that is authorised to carry on the business of a credit institution in a country or territory other than the UK. The Bank is proposing to define the term ‘authorised overseas financial institution’ as meaning a person that is authorised to carry on the business of a financial institution in a country or territory other than the UK.

20.15. CDR 153/2013 Article 44(1)(c) sets out conditions for depositing financial instruments with a third-country financial institution. One of the conditions is that the third-country financial institution is subject to and complies with prudential rules considered by the Bank to be at least as stringent as those applicable to UK credit institutions. The Bank is proposing to delete this condition as there is no current mechanism for an equivalence assessment in this context, and since there are other objective conditions that must be satisfied for the third-country financial institution to be eligible for depositing financial instruments, it was considered disproportionate to create an equivalence assessment for this provision (rule 4.1(3) of the Investment Policy Part). CDR Article 45(1)(b)(ii) also contains this equivalence assessment in relation to the deposit of cash. For the same reason the Bank proposes to delete this condition when consolidating CDR 153/2013 Article 45 (1)(b)(ii) and Article 45(1)(b)(i) (rule 5.1(2) of the Investment Policy Part).

20.16. CDR 153/2013 Article 44(3) outlines restrictions for the re-use of financial instruments posted as margins, default fund contributions or contributions to other financial resources. It applies these restrictions to the highly secure arrangements for the deposit of those instruments. However, the Bank considers it misleading to refer to the ‘deposit’ of financial instruments in this context given that when financial instruments are re-used they are typically lent out or provided as collateral to a third party rather than being deposited with a custodian. The Bank therefore proposed a clarificatory change by removing the reference to the highly secured arrangements for the deposit of those instruments (rule 4.4 of the Investment Policy Part).

20.17. CDR 153/2013 Article 45(1)(b)(ii) states that if a CCP is unable to deposit cash with a central bank, then the CCP can deposit this cash at a ‘third country financial institution’ if it meets certain conditions. A financial institution is defined in UK EMIR Article 2(17) as an undertaking other than a credit institution, and as such is not authorised as a deposit taker. Reference to financial institutions, as well as the requirement for the institution to have robust safekeeping procedures, are therefore not appropriate in the context of depositing cash. CDR 153/2013 Article 45(1)(b)(ii) and Article 45(1)(b)(i) will be consolidated and refer to ‘an authorised overseas credit institution’ as well as ‘an authorised UK credit institution’ (rule 5.1(2) of the Investment Policy Part). The requirement for the overseas institution to have robust safekeeping procedures will be deleted.

20.18. CDR 153/2013 Article 45(2) contains an incorrect cross reference to Article 45. The Bank is proposing to correct this by updating the cross reference in rule 5.3 of the Investment Policy Part to be to the Annex.

20.19. Article 46 of CDR 153/2013 clarifies that only Articles 44 and 45 (addressing highly secured arrangements maintaining cash) apply where collateral is received in the form of financial instruments. The Bank is not proposing to restate Article 46 of CDR 153/2013 as the drafting of Bank rules makes clear which provisions apply to non-cash collateral, meaning this Article is redundant. This is clarificatory and does not amount to a change in scope or policy.

20.20. The Bank proposes to extend the scope of eligible institutions where UK CCPs can deposit financial instruments by including the EU Emission Trading System and the UK Emissions Trading Registry (rule 4.1(4) of the Investment Policy Part). This update is necessary because the existing regulation was put in place before emission allowances were classified as financial instruments, and it now reflects the creation of official registers for holding these instruments.

The Bank’s objectives

20.21. The assessment of the impact of proposals to restate Article 47 of UK EMIR and Articles 43 to 46, and Annex II of CDR 153/2013, with no policy change on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of the Assimilated Law.

‘Have regards’ analysis

20.22. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to investment policy requirements is set out in Chapter 2 – Restatement of Assimilated Law.

20.23. In addition, the following factors were significant in the Bank’s analysis of its proposal to remove the condition from CDR 153/2013 Article 44(1)(c) (rule 4.1(3) of the Investment Policy Part) and Article 45(1)(b)(ii) (rule 5.1(2) of the Investment Policy Part), that the third-country financial institution must be subject to prudential rules considered by the Bank to be at least as stringent as those applicable to UK credit institutions:

1. Using the Bank’s resources in the most efficient and economical way: By eliminating this requirement, the Bank can streamline its regulatory approach and reduce the burden of assessing the equivalence of third-country prudential frameworks. This removes the need for extensive case-by-case evaluations, allowing resources to be directed towards higher-priority risk assessments and supervisory activities that more directly impact financial stability.
2. Proportionality: The existing condition that the third-country financial institution must be subject to prudential rules considered by the Bank to be at least as stringent as those applicable to UK credit institutions imposed a blanket requirement on all third-country financial institutions, regardless of their actual risk profile or systemic importance. Removing it allows a more targeted approach, ensuring that oversight is proportional to the risks posed by individual institutions.

Cost benefit analysis

20.24. The assessment of the costs and benefits associated with proposals to restate Article 47 of UK EMIR and Chapter XI Articles 43 to 46, and Annex II of CDR 153/2013 are set out in Chapter 2 – Restatement of the Assimilated Law.

Chapter 21: Supervisory Processes (model reviews, recognition and extensions), Stress Testing and Back Testing

21.1. This chapter sets out the Bank’s proposals in relation to the supervisory processes relating to model reviews, applications for recognition under FSMA (which is referred to as authorisation in UK EMIR) and extension of that recognition to cover additional services or activities. The relevant Assimilated Law provisions are set out in Articles 14, 15, 17 and 49 of UK EMIR, and Articles 47–61 of CDR 153/2013.

21.2. Article 14 of UK EMIR outlines that any entity in the UK wishing to operate as a CCP must seek authorisation from the Bank. The authorisation specifies the services and financial instruments covered; CCPs must continuously meet authorisation conditions and promptly inform the Bank of any significant changes impacting these conditions.

21.3. Article 15 states that a CCP wishing to extend its businesses to additional services or activities not covered by the initial authorisation must submit a request for an extension to the Bank. Article 17 sets out the procedure that must be followed for both authorisations and extensions of authorisation.

21.4. Article 49(1) of UK EMIR requires CCPs to regularly review and test its models and parameters for margin, default fund contributions, collateral requirements, and other risk control mechanisms. It requires a CCP to obtain independent validation and inform the Bank of the results of the tests performed and to obtain its validation in accordance with Article 49(1a), (1d) and (1e) of UK EMIR before adopting any significant change to the models and parameters.

21.5. Article 49(1a) of UK EMIR requires that a CCP seeking to make a significant change to its models and parameters must apply to the Bank for validation of that change. The CCP must enclose an independent validation of the intended change to its applications and the Bank must confirm the receipt of the complete application to the CCP. Article 49(1)(d) of UK EMIR states that within 90 working days of the receipt of the application for a significant change, the Bank must inform the CCP in writing, including a fully reasoned explanation, whether the validation has been granted or refused. Article 49(1e) of UK EMIR prohibits a from adopting any significant change to the models and parameters before obtaining validation from the Bank and the Bank may allow for a provisional adoption of a significant change of those models or parameters prior to their validations where duly justified.

21.6. CDR 153/2013 sets out further requirements related to the review of models, stress testing and back testing. Article 47 of CDR 153/2013 requires CCPs to conduct a comprehensive validation of their models, methodologies and liquidity risk management framework used to used to quantify and manage their risks, and sets out technical specifications for doing this.

21.7. Article 48 of CDR 153/2013 requires CCPs to have in place policies and procedures detailing the stress and back testing programmes they undertake to calculate their risk control mechanisms, as well as the stress testing programmes they undertake to assess their liquidity risk management frameworks. Articles 49–54 set out technical specifications for these stress and back tests.

21.8. Article 55 of CDR 153/2013 requires CCPs to have procedures in place to ensure sufficient margin coverage in changing market conditions, including by conducting tests on their haircuts and, if collecting margin at the portfolio rather than the product level, reviewing and testing offsets among products. Article 56 details how CCPs must review their models based on the results of their stress and back tests.

21.9. Articles 57 and 58 of CDR 153/2013 respectively require CCPs to conduct reverse stress tests and test their default procedures.

21.10. Article 59 of CDR 153/2013 sets out the frequency with which CCPs must: validate their models, methodologies, liquidity risk management frameworks; review their stress testing procedures; analyse and monitor their model performance and financial resource coverage in the event of defaults through back testing and stress testing; analyse test results to ensure the accuracy of stress testing scenarios, models and liquidity risk management framework, underlying parameters and assumptions; conduct sensitivity analysis using the results of sensitivity tests; test offsets among financial instruments and haircuts; conduct reverse stress tests; test and review their default procedures; and perform simulation exercises.

21.11. Article 60 of CDR 153/2013 defines the time horizons that must be used for stress tests and back tests. Article 61 details information that CCPs must publicly disclose, with respect to the general principles underlying their models and methodologies, the tests they perform and the results of those tests, and key aspects of their default procedures.

21.12. The Bank proposes to restate the UK EMIR provisions listed above relating to model reviews, stress testing and back testing in the Review and Testing of Models and Parameters Part of the CCP rules, subject to changes set out in this chapter which aim to simplify and clarify these processes. HMT’s proposed SI sets out the Bank’s duties and powers under a new legal framework at section 296B FSMA on changes to models and parameters and should be read with this chapter. The Bank also proposes to make a statement of policy relating to these supervisory processes (Annex 4).^{footnote [39]}

21.13. HMT is proposing to restate Articles 14, 15 and 17 of UK EMIR in legislation. The proposal is to amend FSMA the reflect the procedures and requirements contained in these articles, with some changes. For detail of how the restatement is proposed, please see HMT’s publication.

21.14. The new legislation proposed by HMT will place duties on the Bank to reflect the proposed model review process for ‘material’ changes described below. Article 49(1e) of UK EMIR (which requires CCPs to seek validation of significant changes to their models and parameters) and Article 49(2) (which requires CCPs to perform regular tests of their default procedures) will be set out in Bank rules, the former with drafting changes to reflect that CCPs will now be required to apply for permission to make material changes to their models. Articles 47–61 of CDR 153/2013 will also be set out in Bank rules, with minor drafting changes.

21.15. As part of the Bank’s proposals relating to the restatement of requirements related to supervisory processes, stress testing and back testing, the Bank proposes to make a number of changes, which are outlined in the following paragraphs.

Proposed changes related to model changes (Article 49 of UK EMIR)

21.16. The Bank has identified a number of areas in which the current approach to assessing CCPs’ model changes could be streamlined and clarified. The current process can be lengthy: the Bank currently has 90 working days to decide whether to grant or refuse validation of a requested model change deemed significant under Article 49, and there is no deadline for assessing the completeness of a model change application. The current Article 49 threshold for carrying out a review, moreover, does not cover every type of change which the Bank deems as warranting review. The proposed changes set out below are therefore aimed at increasing the proportionality, transparency and speed of the model review process. The Bank believes these measures will reduce regulatory burden for CCPs, and help to promote innovation and efficiencies within them.

21.17. For the purposes of this chapter, ‘models’ are defined as quantitative methods used by CCPs to measure, assess and manage their risks, including credit, collateral, margining and liquidity risks. It is important that models are robust and that there is an effective governance process to test and validate them.

Proposal 1: Establishing a simplified and more proportionate ‘materiality’ threshold

21.18. Under HMT’s proposed SI, the Bank must within 10 working days of receiving a notification of a proposed change to a CCP’s model (Proposal 2 below), notify it in writing of whether it has determined the change to be material or non-material.^{footnote [40]} In order to reach this determination, the Bank must prepare and publish a statement of policy of the matters to which it will have regard.^{footnote [41]} As part of that policy, the Bank proposes to establish a ‘materiality’ threshold which would determine whether changes to a CCPs’ risk models or the introduction of new products within existing recognition orders would require a review. The threshold will also apply to applications for an extension of a recognition order (sub-section on Proposed changes to recognition orders and extensions of recognition orders below).

21.19. The materiality threshold is set out in Annex 2 of the Statement of Policy on ‘The Bank of England’s approach to supervisory processes (model changes, recognition orders and variations of recognition orders) and margin permissions’. It will comprise both quantitative and qualitative criteria. The matters to which the Bank will have regard are expressed in terms of three categories of criteria: (i) qualitative criteria for changes which potentially alter a CCP’s risk profile (eg clearing a new asset class, accepting a new asset class as collateral, or a new type of member or client account); or for changes affecting the CCP’s core risk appetite (eg change of Margin Period of Risk or target coverage level); (ii) criteria applying to changes to important model components (eg to lookback period or add-ons), triggered by a greater than 5% impact on a CCP’s service-level resources; and (iii) criteria applying to changes to key resources (total initial margin, default fund, stressed liquidity requirement), triggered by a greater than 15% impact on a CCP’s service-level resources. A proposed model change will be considered material if it satisfies any one of the individual criteria listed at Annex 2.

21.20. The criteria are designed to be simpler, more comprehensive and more proportionate to the impact of changes than those under Article 49 of UK EMIR. It is expected that they will help to decrease regulatory burden for CCPs, by reducing the number of model changes requiring Bank review by approximately one third (and by approximately 70% when combined with the Bank’s recent streamlining of its processes for non-Article 49 model changes).^{footnote [42]}

21.21. The Bank proposes that CCPs assess their planned changes against these published criteria and notify the Bank by submitting their assessment in advance of making the proposed change, using a standard Model Change Notification Form (MCNF) with the information set out in the Statement of Policy (rule 13.1 of the Review and Testing of Models and Parameters Part). Under HMT’s proposed legislation, the Bank would, upon receipt of the requested information, have 10 working days to notify the CCP of whether it considers the change material or not material.

Proposal 2: Introducing a ‘pre-notify only’ requirement for non-material model changes

21.22. The Bank proposes a new rule that a CCP must notify it of any changes that it proposes to make to the models and parameters referred to in rule 13.1 of the Review and Testing of Models and Parameters Part. The Statement of Policy expands on the scope of this rule explaining how it applies to any change to the clearing risk model beyond the regular intended operation, including any change resulting from the introduction of a new product or new collateral.^{footnote [43]} The notification must include an assessment of the materiality of the proposed change.

21.23. Changes that are assessed by the Bank as not meeting the materiality threshold will be subject to pre-notification requirements only, meaning that a CCP will be able to make this change once the Bank has confirmed that it is non-material. Unless a model change is proposed in connection with an application for a variation of a recognition order,^{footnote [44]} the Bank proposes that a CCP will need to make this notification using the MCNF and providing the information set out in the Statement of Policy. This amendment should enable the Bank to be more proportionate in its review of CCPs’ proposed model changes and reduce the quantity of regulatory approvals CCPs may need.

Proposal 3: Simplifying and shortening the model review process for material changes

21.24. For changes to a model or parameter that are assessed by the Bank as meeting the materiality threshold as set out in the Statement of Policy, the Bank proposes a rule that CCPs will need to apply for permission under section 138BA FSMA^{footnote [45]} to make the change, via submission of the permissions application form (rule 13.4 of the Review and Testing of Models and Parameters Part). The Statement of Policy will set out what information and supporting evidence a CCP must provide with that application which includes sufficient information to allow the Bank to assess whether the proposed change is consistent with the ‘Review and Testing of Models and Parameters, Margin Requirements’, ‘Default Procedures’, ‘Default Fund’, ‘Default Waterfall’, ‘Collateral’ and ‘Liquidity Risk Controls’ Parts of the CCP rules.^{footnote [46]} The Bank will assess the completeness of the information provided and conduct a subsequent review of the proposed changes within a new shorter deadline of 60 working days, set out in HMT’s proposed legislation, simplifying and shortening the process.^{footnote [47]} The Bank’s approach to reviewing the application will be proportionate to the impact of the changes on the CCP’s risk profile and the Statement of Policy will set out the factors which the Bank will consider.^{footnote [48]}

21.25. Under HMT’s proposed legislation, should the Bank need to request further information within this deadline, the day-count will pause until the requested information has been received, and an extra 10 working days will be added to the statutory deadline. Any subsequent requests for information would not affect the new deadline.

21.26. There may be cases where the materiality threshold is not met, but the Bank considers it appropriate to require a CCP not to make the change. In such cases, the Bank may use its power in section 55L of FSMA as applied by paragraph 9B of Schedule 17A to the Act to require the CCP not to make the change or to take or refrain from taking other action in accordance with the scope of the power^{footnote [49]}. For example, the Bank may use the power if it considers that there are material deficiencies in the models or default risk management of a CCP.

Changes related to authorisations and extensions of authorisation (Articles 14, 15 and 17 of UK EMIR)

21.27. Currently, the decision to authorise a CCP or approve the extension of its business to additional services is subject to two statutory deadlines, respectively of 30 working days to assess whether an application is complete, and six months to approve or reject the application.^{footnote [50]}

21.28. There is scope for making these processes more efficient. The standalone deadline for assessing the completeness of applications for authorisations and extensions of authorisation constitutes an unnecessary delay which could be overcome by merging the completeness and review processes, as set out above for model change applications. Moreover, CCPs commonly apply to add products which are not materially different from those covered under their existing authorisation, for example, MSCI futures on a new equity index, or oil futures with a different grade or delivery hub. Such applications would therefore be handled more efficiently and proportionately under an expedited process.

Proposal 4: Simplifying processes and shortening timelines for authorising CCPs and extending authorisations

21.29. HMT’s draft legislation proposes the following changes to the current requirements and procedures:

1. Recognition (referred to as authorisation under UK EMIR) of new CCPs will be subject to a single deadline of 120 working days, during which the Bank will assess the completeness of and evaluate the information provided.^{footnote [51]} Should the Bank need to request further information within this deadline, the assessment period will pause until the requested information has been received, and an extra 30 working days will be added to the deadline. Persistent failure to provide the requested information may result in rejection of the application.^{footnote [52]}
2. Applications for a variation of a recognition order will be subject to a standard review timeline of 80 working days.^{footnote [53]} Should the Bank need to request further information within this deadline (including in cases where a ‘material’ application has incorrectly been made via the expedited process for ‘non-material’ applications (below), the assessment period will pause and an extra 10 days will be added to the deadline. Persistent failure to provide the requested information may result in rejection of the application.

21.30. HMT’s draft legislation provides for the Bank to set out shorter timelines for certain types of application to vary a recognition order. The Bank is therefore proposing an expedited process for applications which it considers ‘non-material’. These applications will be subject to a review timeline of 10 working days, with 10 days added should the require further information, as in the standard process.

21.31. The materiality of applications for variation of recognition will be assessed according to the same materiality threshold as that proposed above for model changes, and set out in the Statement of Policy,^{footnote [54]} maintaining the simplicity of the overall framework. To ensure the variation of recognition order procedure is as analogous to the proposed model change procedure as possible, the Bank will respond to applicants within 10 working days. For non-material applications, this will be to grant the recognition of variation or request further information; for material applications, it will be to confirm materiality (including the materiality of any model changes proposed in connection with the application) or request further information.

21.32. The Bank will set out the procedures, timelines and required supporting evidence for applications for recognition orders and both material and non-material applications for variations of recognition orders, increasing the clarity of the current procedures under UK EMIR.^{footnote [55]}

21.33. As a further enhancement to the review process, the Bank will publicly disclose its performance against the review timelines set out above.

Clarifications and minor changes

21.34. Where Article 49 of UK EMIR refers to ‘significant’ changes, the ‘Review and Testing of Models and Parameters’ Part of the new rulebook will instead refer to ‘material’ changes. Additional cross-referencing text will be added at points where previously mentioned validations, stress tests or back tests are being referred to (eg paragraphs 2.3 and 3.3). In line with the Margin Part of the CCP rules, references to ‘margin’ will be replaced, where appropriate, by the term ‘regulatory initial margin’.

21.35. A number of provisions will be re-ordered for increased clarity: Article 49(2) of UK EMIR and Articles 58, 59(12) and 61(2) of CDR 153/2013 will be moved to Default Procedures Part of the FMI Rulebook, and Articles 54 and 59(6) of CDR 153/2013 will be moved to the Liquidity Risk Controls Part. The remaining provisions on the validation and testing of models and parameters will appear in the Review and Testing of Models and Parameters Part alongside Article 49(1e) of UK EMIR and the new provisions pertaining to the review of model changes.

The Bank’s objectives analysis

21.36. The assessment of the impact of proposals to restate Articles 49(1e) of UK EMIR and Articles 47–61 of CDR 153/2013 on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

21.37. In addition, the Bank considers that Proposals 1–4 will advance its Financial Stability Objective. Simplifying and being more transparent in the new model and product application and review process will support CCPs to respond more effectively and efficiently to their business requirements. For recognition orders, clearer processes will help our determination of whether new CCPs are safe to provide services in the UK. Additionally, the introduction of new materiality thresholds for model changes and variations of recognition orders will focus supervisory resources more effectively towards applications which warrant more thorough evaluation, enabling us to supervise more effectively.

21.38. The Bank also expects that the additional clarity as to how a given change might be treated in the review processes, as well as associated lead times, will facilitate more accurate planning and timely implementation by CCPs of innovations to their clearing services, in line with the Bank’s Secondary Innovation Objective. This should help to improve the efficiency and economy of the services that CCPs provide. Clearer processes for recognition orders may also support innovation by encouraging new entrants to the market.

‘Have regards’ analysis

21.39. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to supervisory processes are set out in Chapter 2 – Restatement of Assimilated Law. In addition, the Bank considers the following factors, to which the Bank is required to have regard as significant factors in shaping Proposals 1–4:

1. Using the Bank’s resources in the most efficient and economical way: The proposed approach seeks to use the Bank’s resources more efficiently by streamlining our review processes and making them more proportionate to the complexity of changes.
2. Proportionality: The proposals seek to make the approval requirements more proportionate to the materiality of changes. The introduction of expedited processes means that model changes and proposed new products assessed as non-material will not be subject to lengthy reviews. The use of requirements powers to require approval of even non-material changes places additional burden only on those firms where we have perceived material deficiencies in risk management.
3. Differences in nature and objectives of businesses: The materiality threshold and two-track application processes for model changes and variation or recognition orders take better account of the differences in nature and objectives of businesses, allowing the Bank to expedite applications where appropriate, potentially freeing up the Bank’s resources for other matters. The proposed use of the Bank’s power under section 55L FSMA to require approval of even non-material changes allows the requirements to be applied differently to firms identified as having material deficiencies.
4. Publishing information: In relation to the proposed use of the requirements power, the Bank will have regard to its final Statement of Policy on its approach to making statutory notice decisions for the use of its requirements powers under section 55Lof FSMA 2000. It deals with the publication of statutory notice decisions by the Bank in relation to the exercise of the Bank’s requirements powers.
5. Transparency: The new regime will be more transparent in terms of the application and review processes, target timelines and the Bank’s performance against them.
6. Not to be determined by location (UK or elsewhere) of persons to whom FMI services are provided: The proposed requirements would apply irrespective of the location of persons to whom CCPs provide services.
7. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: increasing the efficiency and proportionality of our approach to supervisory processes, particularly with respect to reviews of model changes and variations of recognition orders, will support CCPs to respond more quickly to their business requirements and speed up the introduction of new products for clearing, with reduced long-run costs. This could support more widespread adoption of central clearing with benefits for the financial stability of the UK and, by extension, other jurisdictions. Although the new materiality criteria are expected to result in fewer material model change and variation of recognition order reviews, the Bank considers that this will not have a negative effect on the financial stability of other jurisdictions since the new criteria do not represent a lowering of supervisory standards overall.

Cost benefit analysis

21.40. The costs and benefits of the proposals to restate the existing requirements related to supervisory processes, stress testing and back testing for CCPs into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of specific proposals are set out in the following paragraphs.

Costs

21.41. Costs to CCPs: There may be a small, temporary cost to CCPs from having to familiarise themselves with the new framework and alter their internal processes accordingly (including staff training and communication), which the Bank estimates to be around £14,000 per firm for model changes and £14,000 per firm for variations of recognition orders, for a total of £28,000 per firm. There are assumed to be no one-off familiarisation costs pertaining to the changes to the procedure for recognition, given their rarity and application to new firms. No ongoing compliance costs are expected in addition to those already incurred by CCPs, with any potential costs that may arise as a result of the Bank’s exercise of the requirements power (which would only happen in cases where the Bank identified material deficiencies in the models or default risk management of a CCP) to be at least offset by the recent changes to the pipeline process which reduce the compliance burden for non-material changes.

21.42. Costs to clearing members and clients: There should be no direct costs to clearing members as the proposed policy does not attach any further costs or requirements onto them. The costs to CCPs of the new policy are small and one-off, and so it is unlikely they would be passed onto clearing members as indirect costs.

21.43. Costs to the Bank: There is expected to be a modest benefit to the Bank in FTE terms. For reviews of model changes, the shortening of the review period from 90 to 60 working days may increase resource requirements, though the effect is expected to be modest given the proportion (less than 10%) of model change applications resulting in reviews which take more than 60 working days under current timelines. We expect significant reductions (‘Benefits to CCPs’ below) in the number of reviews conducted in light of the new materiality criteria, with only 30% of model changes being evaluated as ‘material’ based on an analysis of applications from the last three years.^{footnote [56]} A large majority of applications, therefore, do not pertain to products with a significantly higher risk profile than those already authorised, and may be handled via the expedited process, with lower resource requirements than a detailed review under the standard process, though this may be offset to an extent by a slight increase in baseline supervision. There is also a chance the decreased review periods make cause a slight increase in the rate of applications submitted, but this is difficult to quantify. Against this, the introduction of an expedited process for variations of recognition orders, standardised application requirements, and the elision of the completeness assessment periods are all expected to offset any increased resource pressures.

Benefits

21.44. Financial stability benefits: The Bank considers that simplifying and being more transparent in our supervisory processes will advance our Financial Stability Objective through the more effective allocation of supervisory resources towards those applications, particularly for model changes and variations of recognition orders, that in the Bank’s view warrant greater attention. CCPs will be able to make adjustments to their risk models and introduce new products more quickly, which could be of particular benefit in stressed market conditions. In the case of new products, faster approvals could support higher levels of clearing in the market more generally. As such, we expect increased responsiveness of models and product offerings due to the introduction of this policy to bring system-wide benefits, while helping to promote innovation by CCPs by allowing them to propose changes with a better sense of how long these will take to be assessed.

21.45. Benefits to CCPs: Recent streamlining of the internally-agreed pipeline process (in effect since April 2024) means that model change applications which were previously subject to a ‘light’ review of 2–3 days (over 50% of the total based on figures to date) are now subject to notification requirements only. It is estimated that the proposed new framework, which incorporates the new materiality criteria would result in a further reduction in model changes requiring review of around 33%, and therefore a 70% reduction relative to the pre-April 2024 framework. Material model change applications that were previously subject to a 90-day limit will be reviewed within 60 working days. The majority of applications for a variation of a recognition order that would be classed as non-material under the new criteria will be reviewed within 10 working days, while reviews for material applications would be concluded within 80 working days.

21.46. The proposed ‘2-3-2’ framework (2 application ‘tracks’, 3 sets of criteria, 2 timeframes) for model changes variations of recognition orders will be clearer for CCPs, and easier for them to engage with. Meanwhile, transparency will be enhanced for all three supervisory processes through the publication of a Statement of Policy featuring an end-to-end explanation of the application procedure and requirements, including timelines, materiality criteria and documentation to be submitted.

21.47. Overall, the Bank considers that the benefits of the proposed changes will outweigh the costs. The benefits of simplifying and shortening the UK’s process for managing applications for model changes and variations of recognition orders will allow CCPs to introduce model changes and new products more quickly, enabling them to engage in innovation and to provide more effective and efficient services to their clearing members. Greater clarity and transparency in these processes will also aid CCPs’ business planning. The costs incurred by the CCPs by way of implementing this policy are expected to be small, and limited to the period of familiarisation with the new framework. The benefits of the changes to the procedure for recognition are also expected to outweigh the costs, though to a lesser extent given the smaller reduction in the overall timeline and the relative rarity of these applications compared with model changes and variations of recognition orders.

Chapter 22: Settlement

22.1. This chapter sets out the Bank’s proposals to restate UK EMIR settlement requirements for CCPs in the Settlement Part of the Bank rules. The relevant material in Assimilated Law is set out in Article 50 of UK EMIR.

22.2. Article 50 of UK EMIR outlines the requirements placed on CCPs regarding the settlement of transactions that are cleared by the CCP. It outlines the expectations for how cash settlement should be conducted and requires a CCPs to clearly set out its obligations and expectations as they relate to the physical delivery of financial instruments. CCPs are required, where practical and available, to use central bank money to settle their transactions. Where central bank money is not used, CCPs must take steps to strictly limit cash settlement risks.

22.3. The Bank proposes to restate this provision in its rules with minor changes (Chapter 2 ‘Restatement of Assimilated Law’). The Settlement Part of the CCP rules is set out in Annex 2.

Bank’s objective analysis

22.4. The assessment of the impact of proposals to restate settlement requirements on the Bank’s primary and secondary objectives is covered in Chapter 2 – Restatement of Assimilated Law. The successful and efficient settlement of transactions is a key factor in maintaining confidence in the financial system, and these provisions minimise the risk of settlement failures for centrally cleared transactions, which supports the Bank’s financial stability objective by maintaining confidence in the financial system.

‘Have regards’ analysis

22.5. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ in relation to settlement requirements is set out in Chapter 2 – Restatement of Assimilated Law.

Cost benefit analysis

22.6. The costs and benefits of proposals to restate settlement requirements for CCPs into Bank rules are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposed restatement of settlement requirements?

Chapter 23: Capital Calculations and Reporting

23.1. This chapter sets out the Bank’s proposals to restate UK EMIR requirements related to capital calculations and reporting, with minor modifications in the Capital Calculations and Reporting Part of the Bank rules. The relevant material in Assimilated Law is set out in Articles 50a (1–3), 50b, 50c (1 and 2) and 50d of UK EMIR and Articles 1–4 of Commission Implementing Regulation (EU) No 484/2014 (CIR 484/2014).

23.2. The Bank proposes to restate these provisions in its rules, incorporating the changes outlined below.

23.3. The provisions in Articles 50a–d of UK EMIR describe how a CCP should calculate its hypothetical capital requirement based on its exposures to its clearing members. This figure is then used to support the clearing members’ calculation of how their exposures to the CCP should be capitalised. CIR 484/2014 sets out further requirements related to capital calculation and reporting.

23.4. Article 50a (3) and Article 50c of UK EMIR requires CCPs to undertake capital calculations at least quarterly, or more frequently where required by competent authorities and to report this calculation to their clearing members (which are institutions or FCA investment firms) and their competent authorities. CIR 484/2014 further specifies that the frequency of this calculation and its reporting shall be monthly, except in the two scenarios set out in Article 3(1), in which case the frequency shall be either weekly or daily.

23.5. The Bank proposes to remove the reference to ‘more frequently where required by the competent authorities’ and to clarify that CCPs must undertake this calculation monthly (rule 4.1 of the Capital Calculations and Reporting Part), unless the following two scenarios occur. In those cases, a CCP must undertake the calculation daily. The two scenarios are where, following the default of one clearing member, the CCP is obliged to use any portion of the pre-funded financial resources that it contributed to the default waterfall or following the default of a clearing member, the CCP is obliged to make use of the default fund contributions of non-defaulting clearing members (rule 4.3 of the Capital Calculations and Reporting Part). In confirming that a CCP must undertake the calculation on a daily basis the Bank is seeking to simplify the rules and provide clarity for CCPs. As part of this, the Bank proposes not to reinstate provisions in CIR 484/2014 that provide further detail on how the weekly calculations should be undertaken.

23.6. A CCP must continue undertaking the capital calculation on a daily basis until the CCP’s own contributions to the default waterfall or default fund are restored (rule 4.4 of the Capital Calculations and Reporting Part). In line with the existing requirement in Article 50c of UK EMIR, the Bank proposes that CCPs are required to report this calculation to its clearing members (which are institutions or FCA investment firms) and to the PRA and FCA (rule 5.1 of the Capital Calculations and Reporting Part). To support this change, the Bank proposes to introduce a new definition of institution to clarify that CCPs are required to report this calculation to clearing members which are credit institutions or UK designated investment firms subject to the Capital Requirement Regulation (CRR). The Bank notes that wider reporting to other authorities is likely to be required to meet the expectations set out in the Basel Framework for calculating capital requirements for bank exposures to central counterparties.

Bank’s objective analysis

23.7. The assessment of the impact of proposals to restate requirements related to capital calculations and reporting on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

23.8. The Bank considers that restating these provisions with minor changes would ensure that clearing member exposures to the CCPs are appropriately capitalised, contributing to the stability of the financial system. The benefits of central clearing depend on a CCP’s ability to mutualise losses across its membership. Clearing members must be in a position to reliably perform on their obligations to the CCP during a default and these provisions help ensure that is possible.

‘Have regards’ analysis

23.9. In developing this proposal, the Bank has had regard to the FSMA regulatory principles and other ‘have regards’. Our analysis of the application of ‘have regards’ relating to proposals covered in this chapter is set out in Chapter 2 – Restatement of Assimilated Law. In addition, the following factors were significant in the Bank’s analysis of its proposed approach to collateral permissions:

1. Proportionality: In line with the principle of proportionality, the Bank intends to focus its oversight on areas that pose higher risk to financial stability, ensuring that its regulatory approach remains balanced and targeted. Providing clear conditions under which a CCP is required to calculate and report its hypothetical capital requirement to its clearing members and the PRA and FCA will streamline processes and reduce unnecessary burdens.

Cost benefit analysis

23.10. The assessment of the costs and benefits associated with proposals to restate Articles 50a–d of UK EMIR and the associated provisions in CIR 484/2014 are set out in Chapter 2 – Restatement of Assimilated Law.

Question: Do you have any comments on the Bank’s proposals related to capital calculations and reporting?

Chapter 24: Interoperability

24.1. This chapter sets out the Bank’s proposals to restate UK EMIR provisions relating to interoperability arrangements in the Interoperability Arrangements Part of the CCP rules, subject to changes set out in this chapter. The relevant Assimilated Law provisions are set out in Articles 51, 52, 53 and 54 of UK EMIR. The Interoperability Arrangements Part of the CCP rules is set out in Annex 2.

24.2. Interoperability arrangements are a link between two or more CCPs enabling clearing members of one CCP to trade with clearing members of another CCP at which they are not a member. After a trade occurs, if the parties to that trade have designated different CCPs to clear it, then a contract automatically arises between the two CCPs on the same terms. Each CCP provides a guarantee to the other that its side of the trade will be fulfilled and each CCP provides a guarantee to its clearing member in relation to the performance of the other CCP.

24.3. CCPs linked in an interoperability arrangement may not be subject to normal participant rules. ESMA Guidelines and Recommendations addressing interoperability arrangements specify that interoperable CCPs are not permitted to contribute to each other’s default funds.^{footnote [58]} This helps mitigate the risk that the default of a clearing member at one CCP transmits stress to its interoperable CCP(s). Certain standards in ESMA’s Guidelines and Recommendations were implemented by the Bank via guidance.^{footnote [59]} Instead of default fund contributions, interoperable CCPs collect additional margin from clearing members, which the CCPs then exchange to collateralise the inter-CCP exposure that arises from the interoperability arrangement.

24.4. Interoperability links create efficiencies and have potential financial stability benefits due to multilateral netting possibilities and reduced market fragmentation. At the same time, they also introduce complexity into the overall risk management system, as they create exposures between CCPs which may present risks if improperly managed. It is therefore important that the regulatory framework is robust and sufficient to deal with a wide range of potential arrangements and the risks they may create.

24.5. Article 51 of UK EMIR outlines requirements that a CCP must comply with to enter an interoperability arrangement. Additionally, when establishing an interoperability arrangement with another CCP for the purpose of providing services to a particular trading venue, the CCP must have non-discriminatory access to the necessary data, provided it complies with the operational and technical requirements of the trading venue, and to the relevant settlement systems. Any rejection or restriction of such arrangements or access can only be made to control risks arising from that arrangement or access.

24.6. Article 52 of UK EMIR sets out risk management requirements a CCP must meet in an interoperability arrangement. It requires CCPs to agree on the rights and obligations of the parties involved, and to have policies, procedures and systems in place to effectively identify, monitor and manage any risk. It also requires interoperable CCPs to identify differences in their risk management models, assess the risks that arise from these differences, and take measures to limit their impact. The article also allocates costs arising from these provisions to the CCP requesting interoperability.

24.7. Article 53 of UK EMIR outlines the provision of margin between interoperable CCPs. It sets out conditions for the deposit, usage and return of collateral provided by one interoperable CCP to another.

24.8. Article 54 of UK EMIR outlines the requirement for interoperability arrangements to be approved by the CCP’s competent authority, and the requirements for this approval.

24.9. Collectively these provisions ensure that the risks arising from an interoperability arrangement are identified and mitigated. This reduces the risk of contagion, in which stress is transmitted from one CCP to its interoperable CCP(s), which may have a significant impact on financial stability given the systemic importance of CCPs.

24.10. The Bank proposes to restate these provisions in CCP rules, subject to changes set out in Proposals 1–4 (including clarificatory and minor changes set out in Proposal 4). The changes listed below include both material and non-material changes. This would ensure that CCPs that set up interoperability arrangements continue to comply with robust risk management standards.

24.11. In addition to UK EMIR, in 2015 the Bank issued guidance implementing ESMA Guidelines and Recommendations. This includes standards on the level and source of inter-CCP margin, a standard on CCP default resources other than inter-CCP margin, a standard on loss allocation rules and post-default arrangements, and a standard applying interoperability provisions to derivative interoperability arrangements that are out of scope of UK EMIR. This guidance will be transferred into the Statement of Policy – The Bank of England’s approach to interoperability permissions (in Annex 3, henceforth referred to as the Interoperability Permissions SoP).

Proposal 1: Scope of interoperability provisions

24.12. Currently, Article 1(3) of UK EMIR restricts the application of Title V to transferable securities and money market instruments. As a result, the Bank supplemented ESMA Guidelines and Recommendations with guidance to clarify that it expects the same EMIR interoperability standards to apply to interoperability arrangements for derivative products. The Bank’s guidance, however, is not legally binding which may create ambiguity for firms. It is therefore unclear whether CCPs setting up an interoperability arrangement for derivatives must seek regulatory approval and meet EMIR requirements.

24.13. HMT is proposing to remove the restriction contained in UK EMIR Article 1(3). Further to this, and consistent with its existing guidance, the Bank is proposing for the Interoperability Arrangements Part of the CCP rules to apply to all instruments currently covered by UK EMIR. Under Bank proposals, instead of approval under Article 54 of UK EMIR, a CCP will be required to obtain a permission under section 138BA of FSMA for an interoperability arrangement (24.30 of this chapter). This would require CCPs to obtain a permission from the Bank irrespective of what asset classes are covered by an interoperability arrangement (rule 2.1. of the Interoperability Arrangements Part). It would also give the Bank a clearer basis to ensure that each interoperability arrangement meets appropriate standards. This position represents the best opportunity for the Bank, as supervisor of CCPs, to ensure that an interoperability arrangement is set up in a way that minimises risks, including contagion risk.

24.14. Interoperability arrangements for derivatives bring more risks and complexity, so it is particularly important that the Bank has sight of these before any arrangements are established. The Bank therefore proposes, in line with HMT’s proposed removal of the restriction in Article 1(3) of UK EMIR, to future-proof the new framework and broaden the scope of interoperability provisions to cover all asset classes.

24.15. The Bank is proposing to reflect that approach in the Interoperability Permissions SoP, setting out the Bank of England’s approach to interoperability permissions.

Proposal 2: Requirement to obtain permission for material changes

24.16. Article 54 of UK EMIR requires CCPs to seek the Bank’s approval when setting up interoperability arrangements, however, it does not specify that approval is required when a CCP makes changes to these arrangements. This may create risks as some changes may be material and affect the risk profile of a CCP.

24.17. Given the potential financial stability implications, the Bank has a particular interest in significant changes to interoperability arrangements. The Bank therefore proposes to state that CCPs must obtain a permission when they make material changes to interoperability arrangements. This would give the Bank sight of potential risks and the power to reject changes that do not meet appropriate standards of risk management.

24.18. The Bank proposes to state that CCPs must obtain permission from the Bank before they make material changes to interoperability arrangements. To achieve this, the Bank proposes to exercise its power to give permissions under section 138BA (rule 2.2. of the Interoperability Arrangements Part). The Bank’s approach to interoperability permissions is set out in the Interoperability Permissions SoP.

24.19. The Bank proposes that a change to an existing interoperability arrangement would be considered material if it meets any of the qualitative criteria outlined in the accompanying Interoperability Permissions SoP. This is intended to capture possible changes that could affect the risk profile of the CCP.

Proposal 3: The power to revoke permission for existing interoperability arrangements

24.20. Article 54 of UK EMIR requires CCPs to seek the Bank’s approval when setting up interoperability arrangements, but does not specify that the Bank has the power to withdraw approval were we to be dissatisfied with an interoperability arrangement.

24.21. As outlined under Proposal 1, the Bank proposes to utilise the permission power under section 138BA of FSMA to permit interoperability arrangements (rule 2.1 of the Interoperability Arrangements Part). In section138BA, it is stated that the regulator may revoke or vary a permission. Utilising the section138BA power would provide the Bank a clear mechanism to revoke a permission concerning an interoperability arrangement, in the event that the CCP was no longer in compliance with the conditions for permission, and had not taken the necessary remedial action to address this. This would allow the Bank to take targeted action where an interoperability arrangement was in breach of rules or fell short of requirements or the Bank’s expectations.

24.22. Where the Bank proposes to revoke a permission, it will set out the reasons for doing so in a written notice and give a date for when the revocation will take effect, according to the procedure that the Bank expects HMT to specify in a further SI in due course – as set out in HMT’s policy note.

Proposal 4: Clarificatory and minor changes

24.23. The Bank proposes to define the term ‘interoperable CCP’. This is a clarificatory change and in line with the existing interpretation of UK EMIR and does not aim to alter the underlying policy intent. The definition is in the Glossary Part of the Bank rules (Annex 2 – Draft Bank Instruments), and is used multiple times in the Interoperability Arrangements Part of the CCP rules.

24.24. Article 51(3) of UK EMIR states that entering into an interoperability arrangement or accessing a data feed or a settlement system can be rejected or restricted only in order to control any risk arising from that arrangement or access. The Bank proposes to omit Article 51(3) of UK EMIR from CCP rules on the basis that interoperability arrangements are commercially driven agreements between the parties agreeing the arrangement, and that the phrase ‘control any risk’ lacks clarity. The omission would not result in additional financial stability risk given an arrangement could still be rejected by the Bank if it posed a risk to financial stability.

24.25. The Bank also proposes a definitional change to Article 51(2) of UK EMIR. The definition of trading venue in UK EMIR, including for the purpose of UK EMIR Article 51(2), currently refers to a UK trading venue, meaning a UK regulated market, a UK Multilateral Trading Facility (MTF), or a UK Organised Trading Facility (OTF). This means that this provision applies to CCPs when they provide services only to UK trading venues. The provision requires a CCP providing services to a particular trading venue to have non-discriminatory access to data needed for the performance of its functions (subject to conditions) and to the relevant settlement system. It is important that this provision is applicable to CCPs regardless of where a trading venue is located, given that UK CCPs’ interoperability arrangements may be with non-UK CCPs. The Bank is therefore proposing to amend the definition of ‘trading venue’ to mean a regulated market, an MTF or an OTF regardless of their location (rule 3.1. of the Interoperability Arrangements Part).

24.26. Article 52(1) paragraph 2 of UK EMIR requires interoperable CCPs to use the same rules concerning the moment of entry of transfer orders into their respective systems and the moment of irrevocability as out in the Financial Markets and Insolvency (Settlement Finality Regulations) 1999, where relevant. The Bank is of the view that it would be more appropriate and realistic to require that these moments are coordinated to the extent possible, rather than requiring the same rules, and that this achieves a broadly equivalent outcome (rule 4.2 of the Interoperability Arrangements Part). A non-UK interoperable CCP may be subject to a different settlement regime (or no such regime).

24.27. Article 52(1) paragraph 3 of UK EMIR requires that, for the purpose of Article 52(1)(c), the terms of an interoperability arrangement outline the process for managing the consequences of the default where one of the CCPs with which an interoperability arrangement has been concluded is in default. In turn, Article 52(1)(c) of UK EMIR requires interoperable CCPs to manage risks so that the default of a clearing member of one CCP does not affect an interoperable CCP. The Bank proposes in restating Article 52(1) paragraph 3 to remove reference to Article 52(1)(c), to clarify that the two provisions relate to managing different defaults, either the default of an interoperable CCP (rule 4.3 of the Interoperability Arrangements Part) or the default of a clearing member (rule 4.1(3) of the Interoperability Arrangements Part).

24.28. Article 52(1) paragraph 4 of UK EMIR requires CCPs to have robust controls over the re-use of clearing members’ collateral under the interoperability arrangement, if permitted by their competent authority. The Bank considers the ‘re-use of collateral’ in this context to refer to the process by which a CCP uses the collateral provided by a clearing member to cover that member’s own positions, to then collateralise inter-CCP exposure. The Bank currently does not permit this process via its standard on the source of inter-CCP margin, found in the Bank’s guidance implementing ESMA Guidelines and Recommendations. This is a position the Bank intends to maintain and proposes to transfer into the accompanying Interoperability Permissions SoP. The Bank therefore does not propose to restate Article 52(1) paragraph 4 of UK EMIR into CCP rules.

24.29. Under UK EMIR Article 53(2), if a CCP that enters into an interoperability arrangement with another CCP only provides ‘initial margins’ to that CCP under a security financial collateral arrangement, the receiving CCP has no right of use over ‘the margins’ provided by the other CCP. The Bank is proposing to refer to ‘initial margin’ rather than ‘initial margins’, and to clarify that when the provision then refers to ‘the margins’, it specifically means this initial margin (rule 5.2. of the Interoperability Arrangements Part). In addition, in the Glossary Part of the Bank rules, the Bank proposes to define the term ‘security financial collateral arrangement’ in line with the existing interpretation of UK EMIR. This is a clarificatory change and does not aim to alter the underlying policy intent.

24.30. Under Article 54 of UK EMIR, CCPs must seek regulatory approval from their competent authority when they intend to establish an interoperability arrangement. The Bank proposes to use the permission power under section 138BA of FSMA to give effect to this provision (rule 2.1. of the Interoperability Arrangements Part). This achieves the same effect as the existing requirement to seek the Bank’s approval in UK EMIR, and the Bank expects that interoperable CCPs with any existing relevant approvals will be deemed to have been given permission so that CCPs do not need to reapply (Chapter 5 on Interpretation and General Provisions). The Bank’s proposed approach to giving this regulatory permission is set out in the Interoperability Permissions SoP.

24.31. Article 54(2) of UK EMIR states that competent authorities shall grant approval for an interoperability arrangement only where the following conditions are met: (i) both CCPs are authorised under Article 17 or recognised under Article 25; (ii) the requirements of Article 52 are met; (iii) the technical conditions under the terms of the arrangement allow for a smooth and orderly functioning of financial markets; and (iv) the arrangement does not undermine the effectiveness of supervision. As these requirements relate to the exercise of the Bank's permission power, through which interoperability arrangements would be permitted, the Bank proposes to restate them in the Interoperability Permissions SoP. Where appropriate, cross-references will be updated to reflect that the relevant processes are being restated elsewhere. As Article 25 of UK EMIR is to be restated, reference to recognition will be updated to reflect recognition under section 300EA FSMA, which is currently set out in draft HMT legislation and not yet in force.

24.32. The Bank’s proposed approach to giving regulatory permission for a new interoperability arrangement (rule 2.1. of the Interoperability Arrangements Part) or a material change to an existing interoperability arrangement (rule 2.2. of the Interoperability Arrangements Part) is set out in the Interoperability Permissions SoP. This establishes:

1. the information that that the Bank will require as part of the initial application for the permission;
2. the supporting evidence that the Bank will require in respect of the criteria for permission;
3. the Bank’s approach to assessing the application. This includes the factors that the Bank will consider and integrates existing standards currently found in the Bank’s guidance (level of inter-CCP margin, source of inter-CCP margin, CCP default resources other than inter-CCP margin, and loss allocation rules and post-default arrangements). This also integrates Article 54(2) of UK EMIR as specified above. The section also addresses timelines, and that the Bank in general expects to determine the outcome of an application within 80 business days;
4. the Bank’s approach to making a decision on an application including that if an application is rejected it will state the reasons, and its approach to varying or revoking a permission; and
5. the Bank’s approach to permission for a material change to an existing interoperability arrangement. This includes criteria that the Bank considers as constituting a material change to an interoperability arrangement.

24.33. The Interoperability Permissions SoP should be read alongside the Bank’s ongoing consultation and proposed Statement of Policy on its approach to rule permissions and waivers.

The Bank’s objectives

24.34. The assessment of the impact of proposals to restate requirements relating to interoperability on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

24.35. In addition, the Bank considers that the proposed changes to the interoperability provisions will advance its Financial Stability Objective. Interoperability arrangements can pose financial risk if they are insufficiently managed. The Bank considers that the proposed straightforward requirement for CCPs to seek regulatory approval before establishing interoperability arrangements for derivatives would ensure that these interoperability arrangements are subject to thorough regulatory assessment, mitigating potential systemic risks. By maintaining oversight, the Bank would be able to evaluate the risks associated with such arrangements, including counterparty risk and operational risk. This approach supports a robust and well-supervised financial infrastructure, ultimately reinforcing stability within the financial system. In addition, giving permission for interoperability arrangements, and material changes to interoperability arrangements, allows the Bank to ensure that these arrangements incorporate appropriate risk controls.

24.36. The Bank considers that its proposal is compatible with its Secondary Innovation Objective. A straightforward approach to the status of interoperability arrangements for derivatives and the conditions for establishing such arrangements makes it simpler for firms to plan new interoperability proposals. This enables firms to innovate by potentially extending the range of products cleared via interoperability arrangements with other CCPs.

‘Have regards’ analysis

24.37. The ‘have regards’ analysis of proposals set out in this chapter is substantially covered by the ‘have regards’ analysis set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of the proposals described in this chapter are set out in the following paragraphs.

1. Using the Bank’s resources in the most efficient and economical way: Our proposal clarifies the need for Bank permission for material changes to interoperability arrangements, and the power of the Bank to revoke a permission in the event of non-compliance with the conditions for permission. In doing so it allows the Bank to better assess and address risks associated with interoperability. In addition, requiring approval for material changes rather than all changes ensures Bank resources are deployed effectively. We do not expect our proposals to lead to a significantly increased monitoring or assessment supervisory burden for the Bank, due to the infrequency of new interoperability links or material changes to them.
2. Proportionality: Our proposed amendments can be expected to form some additional costs for CCPs given the need for familiarisation and the requirement to obtain permission for material changes to interoperability arrangements. However, the proposed approach would give CCPs more clarity by straightforwardly requiring Bank permission for derivatives arrangements and for material changes, in a way that minimises potential costs and waste. We believe it is proportionate to provide further clarity as derivatives arrangements can be more complex and riskier than eg cash equities arrangements.
3. Differences in the nature and objectives of businesses: The Bank has considered that CCPs and those accessing clearing services may want to utilise interoperability arrangements for a variety of asset classes based on the nature of, and objectives of, their businesses. However, the current provisions of UK EMIR only explicitly bring transferable securities and money market instruments into scope, with subsequent Bank guidance outlining that its supervisory expectations also apply to interoperability arrangements for derivatives. These proposals reduce this complexity by straightforwardly bringing all asset classes into scope. The proposals also acknowledge that only material changes need permission from the Bank, and therefore take into account the different levels of risk posed by proposed changes to interoperability arrangements by firms.
4. Facilitating fair and reasonable access to FMI services: The Bank’s proposal expanding the scope of asset classes covered by interoperability arrangement provisions may give clearing members more options as to which CCPs to use if they want to trade in a certain asset class with certain counterparties, where they are not already both clearing members of the same CCP. Creating a clearer framework for them will improve access to FMI services.
5. Effects on financial stability of non-UK countries or territories in which FMI entities are established or provide services: Ensuring high standards of regulation for interoperability arrangements set up by UK CCPs also maintains high quality arrangements for their non-UK CCP counterparts. It is expected to have a positive impact on overseas financial stability to ensure UK CCPs manage risks produced by interoperability arrangements well.

Cost benefit analysis

24.38. The costs and benefits of the proposals to restate interoperability requirements in CCP rules are set out in Chapter 2 – Restatement of Assimilated Law. Additional considerations in respect of specific proposals are set out in the following paragraphs, with figures estimated using the standard cost model.

Costs

24.39. Costs to CCPs: Costs will only impact CCPs that have interoperability arrangements or that intend to set up such an arrangement. Currently only one UK CCP has interoperability arrangements. As firms will be required to seek permission for material changes to interoperability arrangements, there may be increased compliance costs, and a time cost of a firm waiting for the Bank to provide permission. Compliance costs include training and familiarisation costs, internal resourcing to prepare an application for a material change, and external services such as lawyers, accountants, and other professional services.

24.40. We do not expect the proposed policies to generate additional costs for technology or IT builds as the proposals represent a formalisation of existing guidance addressing derivative interoperability arrangements, and clarification of Bank powers.

24.41. Compliance cost for CCPs for the transition to a new regime. We assume it would take approximately 25 person days. This results in an overall one-off roll-out cost of £18,000 per CCP. That these estimates are fairly low reflects that the proposals expand the scope of asset classes covered by interoperability arrangement provisions and clarify Bank powers, but firms would still need to spend some time reading the final policy and analyse how final rules would compare to the current regime. This would therefore primarily be a familiarisation cost that would only apply to a CCP that either has an interoperability arrangement or that is considering establishing an interoperability arrangement.

24.42. Ongoing cost of submitting material changes to interoperability arrangements to the Bank for approval. We assume it would take approximately 15 working days to prepare documentation for an application to the Bank for approval for material changes. This estimate assumes five FTE at the CCP who are involved in this process, for an overall 75 person days. This results in a repeatable one-off cost of £54,000 every time a CCP wants to materially change an interoperability arrangement in order to receive Bank permission. Due to the nature of interoperability arrangements, we expect material changes to be rare, and therefore this cost to be infrequent.

24.43. Ongoing cost of seeking regulatory approval to set up interoperability links for asset classes not explicitly in scope of UK EMIR provisions. We assume it would take approximately 30 working days to prepare documentation for an application to the Bank for approval of a new interoperability link. This estimate assumes five FTE at the CCP who are involved in the process, for an overall 150 person days. This results in a repeatable one-off cost of £109,000 each time a CCP wants to set up a new interoperability link for such asset classes. We expect this to be a rare event, and therefore an infrequent cost.

24.44. Costs to clearing members and clients: There should be no direct costs to the clearing members as the proposed policy does not attach any further costs or requirements onto them. There could, however, be indirect costs as CCPs could choose to pass on the extra costs they face to their customers, such as in the form of higher costs for using the CCPs’ clearing services.

24.45. Cost to the Bank: There will be a resource and financial cost to the Bank to review material changes to interoperability arrangements and to approve new interoperability arrangements.

24.46. Cost to the Bank of reviewing material changes to interoperability arrangements. We assume it will take 15 working days for the Bank to review material changes to interoperability arrangements and follow up with the CCP in relation to any aspects of the application. This would require three FTE from the supervision and risk teams. This results in costs to the Bank of £27,000 per application. Due to the nature of interoperability arrangements, we expect material changes to be rare, and therefore this cost to be non-material.

24.47. Cost to the Bank of giving permission for interoperability arrangements for all asset classes. We assume it will take 30 working days for the Bank to review an application and follow up with the CCP. This would require three FTE from supervision and risk teams. This results in costs to the Bank of £53,000 per application. We expect new interoperability links to be rare, and therefore this cost to be non-material.

Benefits

24.48. Financial stability benefits: Bringing all interoperability arrangements straightforwardly into scope of relevant provisions will enhance financial stability by ensuring that every interoperability arrangement is reviewed and permitted by the Bank, regardless of asset class. The permission stage represents the best opportunity for the Bank to assess risks attached to a potential interoperability arrangement. It will also simplify the position of interoperability arrangements involving derivatives which is currently outlined in Bank guidance which is not legally binding.

24.49. Requiring Bank permission for material changes will enhance financial stability by ensuring the Bank has oversight of changes to existing arrangements that could introduce additional risks to an interoperability arrangement.

24.50. Providing a clear mechanism for the Bank to revoke permission for an interoperability arrangement in the event of non-compliance with the conditions for permission will enhance the Bank’s ability to mitigate unacceptable risks to financial stability that could be posed by inadequate risk management in an existing interoperability arrangement.

24.51. Benefits to CCPs: The proposed changes would simplify the application of requirements and the permissions process for interoperability arrangements involving asset classes that are not explicitly covered by the requirements in UK EMIR, such as derivatives interoperability arrangements. By doing so this will provide a clearer regulatory framework for CCPs, and provide greater confidence to them regarding the Bank’s expectations and the parameters of interoperability requirements. This may aid the development of new interoperability arrangements and help realise the benefits of interoperability, which include reduced market fragmentation and multilateral netting possibilities. Enhanced regulatory oversight would also reduce the likelihood of losses to firms that could arise from contagion if a link is insufficiently risk managed and becomes a transmitter of stress between CCPs.

24.52. Benefits to Clearing Members and end users: A clearer framework for interoperability arrangements is likely to promote competition among CCPs, offering firms greater flexibility in choosing where to clear. This may reduce the need for firms to become direct CMs of multiple CCPs, which could help lower costs for their clients and end-users. However, the extent of this benefit to end-users remains uncertain and may depend on how firms pass on any efficiencies achieved.

24.53. Overall, the Bank considers that the benefits of this proposal will outweigh the costs. It will simplify the application of regulatory requirements to interoperability arrangements regardless of asset class, include a permission requirement for material changes to existing arrangements, and provide a clear mechanism to revoke permission in cases of non-compliance with the conditions for permission. By doing so these proposals ensure the risks associated with interoperability arrangements can be assessed and managed, including on an ongoing basis. These benefits outweigh the costs which are estimated to be low because in practice the proposals amount to a formalisation of existing guidance. Interoperability arrangements are also relatively uncommon, meaning that regulatory costs associated with development or material changes are expected to be infrequent.

Chapter 25: Recognition of non-UK CCPs

25.1. This chapter sets out the Bank’s proposals to restate CCP-facing requirements relating to the Bank’s recognition of non-UK CCPs in its rules, subject to modifications set out in this chapter. The proposed Overseas CCPs Part of the CCP rules is set out at Annex 2. The relevant material within Assimilated Law is set out in Articles 25, 25a, 25b, and 25p of UK EMIR, and Article 2 of CDR 153/2013.

25.2. Article 25 of UK EMIR sets out the procedures for the Bank to recognise non-UK CCPs for the provision of clearing services to clearing members or trading venues established in the UK. It also includes requirements for applicant non-UK CCPs and recognised systemic (Tier 2) and non-systemic (Tier 1) non-UK CCPs. The Bank determines whether an applicant non-UK CCP is systemic or non-systemic in accordance with the SoP – The Bank of England’s approach to tiering incoming central counterparties under Article 25 of UK EMIR (herein referred to as the ‘Tiering SoP’).^{footnote [60]} A key condition for the recognition of systemic non-UK CCPs is their compliance on an ongoing basis with Article 16 and Titles IV and V of UK EMIR.

25.3. In addition, Article 25 outlines the requirements regarding the Bank’s cooperation arrangements with home authorities in relation to both systemic and non-systemic recognised non-UK CCPs. Article 25a sets out procedures for comparable compliance, which allows non-UK CCPs deemed systemic to request deference in specific areas where the Bank considers equal or comparable supervisory outcomes are achieved through the home regimes. If comparable compliance is given, the Bank can defer to home authorities for the regulation and supervision of those specific areas. The comparable compliance procedures are only relevant to systemic non-UK CCPs which, when recognised, are subject to direct UK supervision and regulation in line with paragraph 1.2 of the Tiering SoP. Recognised non-systemic non-UK CCPs are primarily supervised by the relevant home authorities.

25.4. Article 25b covers ongoing compliance with UK requirements for recognised non-UK CCPs that have been deemed systemic by the Bank. Article 25p sets out conditions for the withdrawal of UK recognition from non-UK CCPs.

25.5. Article 2 of CDR 153/2013 clarifies the information a non-UK CCP shall submit within its application for UK recognition. The Bank provides further guidance for applicant non-UK CCPs on the basis of Article 2 of CDR 153/2013.

25.6. The restatement of the majority of provisions within Articles 25, 25b, and 25p is expected to be included in draft HMT legislation. The provisions include the powers and responsibilities of the Bank and HMT regarding recognised and applicant non-UK CCPs, and the obligations on applicant non-UK CCPs (as non-UK CCPs are not subject to Bank rulemaking powers until they are recognised). The recognised non-UK CCP-facing requirements in the UK EMIR Article 25 framework represent only a small part of those Articles, and relate to ongoing obligations for recognised non-systemic and systemic non-UK CCPs following recognition. The Bank proposes that these obligations for recognised non-systemic and systemic non-UK CCPs will be restated in the Overseas CCPs Part, with minor modifications which do not alter the policy outcomes.

25.7. Minor changes apply to the requirements for recognised systemic non-UK CCPs which, under the Bank’s proposals, will refer to compliance with the relevant Parts, according to rule 3.1 of the Overseas CCPs Part, rather than UK EMIR. In addition, the CCP rules will use the terminology ‘overseas CCP’ when referring to a non-UK CCP that has been recognised by the Bank and will replace the UK EMIR terms ‘Tier 1’ and ‘Tier 2’ with ‘non-systemic’ and ‘systemic’ respectively. Therefore ‘systemic overseas CCP’ in CCP rules will refer to a recognised non-UK CCP in relation to which a determination by the Bank under section 300EF(1) FSMA (that the CCP is systemically important, or likely to become systemically important, to the financial stability of the UK) has effect. ‘Non-systemic overseas CCP’ will refer to a recognised non-UK CCP that is not designated as systemic. This is in line with definitions HMT is proposing to apply in restated legislation, and does not alter the Bank’s existing approach to tiering non-UK CCPs.

25.8. The Bank is proposing to restate the following requirements for recognised non-UK CCPs in the Overseas CCPs Part:

1. A requirement for non-systemic overseas CCPs to notify the Bank regarding any material changes relevant to whether the CCP meets certain conditions for recognition set out in FSMA.^{footnote [61]}
2. The application to systemic overseas CCPs of those Parts of the CCP rules that rules restate Article 16 and Titles IV and V of UK EMIR.^{footnote [62]}
3. A requirement for systemic overseas CCPs to notify the Bank regarding any material changes relevant to whether the CCP meets certain conditions for recognition set out in FSMA, including conditions relating to compliance with the CCP rules.^{footnote [63]}
4. A requirement for systemic overseas CCPs to provide annual written confirmation of the CCP’s compliance with the conditions of recognition set out in FSMA, relating to compliance with Bank rules.^{footnote [64]}

25.9. Article 25a of UK EMIR will not be restated in legislation. The Bank proposes to recreate the effect of comparable compliance under Article 25a of UK EMIR using the permissions power under section 138BA of FSMA (subject to HMT making the anticipated legislation) and making related updates to the SoP – The Bank of England’s approach to comparable compliance under EMIR Article 25a (herein referred to as the ‘Comparable Compliance SoP’). The permissions power would enable the Bank to waive or modify the requirement for recognised systemic CCPs to comply with relevant parts of the CCP rules, and the Bank would give such a ‘comparable compliance permission’ where it judges that comparable supervisory outcomes are achieved in a home jurisdiction. The Bank considers that this achieves the same outcome as the existing process under Article 25a of UK EMIR.

25.10. Article 2 of CDR 153/2013, which sets out the information required from non-UK CCPs applying for UK recognition, will not be restated in legislation. Guidance for applicant non-UK CCPs (including the information required in applications) will be maintained on the Bank’s website.

25.11. The proposals set out above are in alignment with the existing provisions and will therefore not affect current policy outcomes. The proposed changes will require some consequential amendments in relation to the Tiering SoP and Comparable Compliance SoP. The proposed amendments to these SoPs are being consulted on as part of this consultation paper, and are included at Annex 6. The Tiering SoP amendments are intended to reflect HMT’s expected restatement of the UK EMIR tiering framework within FSMA. As noted above, the Comparable Compliance SoP amendments are intended to reflect the use of the section 138BA permissions power by the Bank (subject to anticipated HMT legislation) to waive or modify rules for systemic overseas CCPs on the basis of a ‘comparable compliance permission’. The proposed amendments to the Comparable Compliance SoP are subject to anticipated legislation in relation to section 138BA FSMA, which requires HMT to make regulations in order for the Bank to waive or modify rules in relation to individual FMIs. Furthermore, both SoPs (under the proposed amendments) make reference to provisions within draft HMT legislation that is not yet in force. As such, the proposed amendments may be subject to change.

25.12. Furthermore, the Bank intends to consult on a Statement of Policy regarding its approach to the variation of recognition for overseas CCPs. This will be consulted on in due course and therefore is not included in the current consultation paper.

The Bank’s objectives

25.13. Assessment of the impact of the proposals regarding the restatement of CCP-facing requirements on the Bank’s primary and secondary objectives is covered by the analysis set out in Chapter 2 – Restatement of Assimilated Law.

25.14. The Bank’s framework for tiering non-UK CCPs and comparable compliance policy are designed to be risk-based and proportionate. Under these proposals, the approach to tiering and comparable compliance would remain consistent with existing policy outcomes. As such, this would continue to support the Bank's Financial Stability Objective by maintaining the financial stability benefits of cross-border clearing, and avoiding the potential financial stability risks of regulatory duplication.

Cost benefit analysis

25.15. The costs and benefits of the proposals to restate existing requirements for non-UK CCPs into the Overseas Part are outlined below.

Costs

25.16. Cost to CCPs: The costs arising from our proposals would result in a small familiarisation cost for non-systemic non-UK CCPs. There would be no additional compliance cost for these CCPs as the Bank does not intend to make material changes to the existing tiering policy.

25.17. The Bank assesses the cost of restating requirements for recognised non-systemic non-UK CCPs in the CCP rules as one compliance professional person-day, estimated at £355 per non-UK CCP in the standard cost model for familiarisation, given there is no change in firm-facing requirements.

25.18. As set out in the cost benefit analysis under Chapter 2 and Chapter 3, the Bank considers that the cost to recognised systemic non-UK CCPs would align with the cost estimates for UK CCPs but could be lower in individual cases where a comparable compliance permission is given.

25.19. Cost to the Bank: The Bank would face an additional cost of applying the permission power when giving a comparable compliance permission. This would only arise should a non-UK CCP be designated as systemic, and on the basis of that CCP applying for a comparable compliance permission.

Benefits

25.20. The majority of UK EMIR Article 25 and related provisions would be restated in legislation. The small number of requirements placed on recognised non-UK CCPs, which relate to ongoing obligations following recognition, would move to the Overseas CCPs Part without material changes. UK firms (banks, insurers and investment firms) will benefit from this approach as they will continue to have access to a wider variety of cleared markets, and a diversity of choice in the providers of clearing services would continue to create competitive incentives for CCPs to innovate.

25.21. The Bank’s proposed approach would also continue to benefit financial stability as the Bank will continue to apply its current approach to tiering, where non-UK CCPs are recognised based on risk they pose to UK financial stability, and depending on whether the Bank will be able to place reliance on the supervision of the home authority. The proposals would also provide simplicity and clarity for recognised non-UK CCPs by placing all requirements in the same location in the Overseas CCPs Part. Requirements that relate to the Bank and HMT will remain in legislation.

‘Have regards’ analysis

25.22. Our analysis of the application of ‘have regards’ relating to proposals outlined in this chapter is set out below:

1. Proportionality: The proposed approach to the repeal and replace of the UK EMIR Article 25 framework formalises existing practices relating to recognition of non-UK CCPs. The costs imposed on non-UK CCPs were considered to ensure that they are proportionate to the benefit of safeguarding financial stability.
2. Recognition of differences between businesses: The Bank’s proposal to maintain its current approach to tiering non-UK CCPs recognises differences between non-UK CCPs based on the level of risk they pose to UK financial stability. This enables the Bank to designate non-UK CCPs as non-systemic (where reliance is placed on the supervision of the home authority), or as systemic (where the CCP must comply with relevant Parts, according to proposed rule 3.1 of the Overseas CCPs Part, and is supervised by the Bank directly – subject to any comparable compliance permission).
3. Transparency: The Bank considers that this is a significant factor in the development of our proposals. Setting out requirements for non-UK CCPs in one place will make the rules more accessible and support the transparency of the Bank’s regulatory framework.
4. Publication of information: Under HMT’s proposals, provision for the Bank to publish information relating to recognised non-UK CCPs will be restated in legislation. The Bank will maintain its current approach to publishing such information.
5. Effects on the financial stability of non-UK countries or territories in which FMI entities are established or provide services: Under these proposals, the Bank will retain its current approach to tiering, where the Bank places reliance on the non-UK CCP’s home authority for supervision and regulation of recognised non-systemic non-UK CCPs. The Bank will also retain its current approach to comparable compliance, which will be implemented under the Bank’s permissions power. This supports the financial stability of the jurisdictions in which recognised non-UK CCPs are established by reducing the potential for regulatory duplication and unnecessary burdens on non-UK CCPs.

Chapter 26: Eligible Collateral – Uncollateralised Bank Guarantees (for discussion)

26.1. Collateral is a critical part of the risk management framework of CCPs and is crucial to their resilience. CCPs collect collateral as margin to ensure that, in the event a clearing member defaults on their obligations, there are sufficient resources available to cover potential losses. This mechanism helps protect other market participants and minimises the risk of contagion spreading across the system.

26.2. Under UK EMIR, CCPs can only accept highly liquid collateral with minimal credit or market risk. This requirement ensures that, in the event of a default, the collateral can quickly be converted into cash with minimal impact on its value, including in stressed market conditions. CDR 153/2013 specify the types of instruments and assets that can be used as collateral and outline the conditions for their acceptance.

26.3. The Bank notes that there has been growing interest from industry in expanding the range of eligible collateral. This chapter focuses on bank guarantees that are not fully collateralised, but the Bank is also interested in industry’s views on other potential options to expand the range or availability of eligible collateral that could be considered. This chapter does not include policy proposals. Based on feedback received through this consultation, the Bank may consider changes to the scope of eligible collateral. Any future proposals will be subject to consultation and a cost benefit analysis.

Uncollateralised bank guarantees

26.4. During the energy crisis in 2022 users of CCPs raised concerns about the narrow range of eligible collateral that can be accepted by CCPs and the impact this might have on firms’ ability to meet margin calls in times of stress amid price volatility.^{footnote [65]} Box B highlights some of the liquidity strains that firms experienced in 2022.

26.5. During the 2022 energy crisis some jurisdictions eased collateral requirements to allow clearing members to post bank guarantees that are not fully collateralised as collateral. Bank guarantees are issued by commercial banks that create an irrevocable right for the named beneficiary to receive a cash payment from the issuing bank for a pre-specified amount. In the context of clearing, bank guarantees require the issuing bank to cover – up to a specified limit – the outstanding amount of a defaulter’s margin requirement owed to the CCP.

26.6. CCPs can currently accept bank guarantees if they meet the requirements set out in UK EMIR, including that they are fully collateralised (CDR 153/2013 Art 39). Commercial bank guarantees can currently only be used as collateral by non-financial clearing members (UK EMIR Art 46).

26.7. Prior to EMIR coming into force in 2012, there was no requirement in the UK for bank guarantees to be fully collateralised, and some CCPs accepted them as collateral. In the US, uncollateralised bank guarantees can be accepted by CCPs as initial margin. As part of the recent review of the EU clearing framework, EU rules permit the use of uncollateralized bank guarantees as collateral. The Bank seeks views on whether similar measures should be considered and implemented in the UK.

26.8. The primary benefit of permitting not fully collateralised bank guarantees is that they could provide clearing members and clients additional sources of funding in times of stress. This flexibility may allow them to better manage their liquidity needs without relying solely on cash or high-quality debt securities. Reducing the immediate demand for these assets to meet margin calls through permitting uncollateralised bank guarantees could enhance financial stability by reducing strain on liquidity and mitigating systemic risks during periods of market stress.

26.9. However, the use of uncollateralised bank guarantees may also present risks. They can create interconnectedness and complexity in the financial system in several ways. CCPs depend on the financial health and creditworthiness of the issuing banks. If the issuing bank fails to deliver – not providing cash to make up for a default of the clearing member – or withdraws the uncollateralised bank guarantees when a clearing member defaults, it could expose CCPs to significant credit risk. The default of an issuing bank can put stress on the system if that bank is a large issuer of bank guarantees that are being used as CCP margin collateral. A failure in one part of the system, such as an issuing bank defaulting, could cascade through the network, amplifying systemic risk.

26.10. These risks can be mitigated. Potential measures to address these risks could include the requirements for uncollateralised bank guarantees to be irrevocable and imposing conservative limits on the amount of bank guarantees posted as margin – per client, per clearing member, and at the overall CCP level. A requirement could also be introduced that unbacked bank guarantees can only be issued by authorised credit institutions that comply with robust regulatory standards.

26.11. Additional measures could include introducing strict minimum contractual standards for uncollateralised bank guarantees and minimum haircutting (ie, the percentage deduction from the market value of collateral). CCPs could be required to publish relevant information about the use of uncollateralised bank guarantees and monitor concentration risk. The scope could be further mitigated by restricting the use of uncollateralised bank guarantees to non-financial firms only and to specific markets.

26.12. The Bank seeks to understand the potential impact that changes to the scope of eligible collateral could have on CCPs and the users of financial markets, including, for example, forms of tokenised assets being accepted as eligible collateral. Responses to this Discussion Section will inform the Bank’s approach to this matter and help shape future policies. Any policy change would be subject to consultation and CBA.

Annexes