Following the UK’s withdrawal from the European Union (‘EU’), the Bank of England (‘the Bank’) has responsibility for recognising and supervising non-UK central counterparties (‘incoming CCPs’) intending to provide clearing services to clearing members or trading venues established in the UK.
The Bank has issued a Statement of Policy setting out its approach to ‘tiering’ incoming CCPs. Tiering is the classification of individual incoming CCPs according to the level of systemic risk they could pose to UK financial stability. An incoming CCP that is designated Tier 2 (where that CCP is systemically important or likely to become systemically important for the financial stability of the UK) can become subject to direct UK supervision and regulation under the on-shored European Market Infrastructure Regulation (EMIR). There may however be specific regulatory provisions for which these CCPs can be granted “comparable compliance”, and the UK can defer its supervision in these areas to the home authorities, as outlined in a separate Statement of Policy. An incoming CCP that is designated Tier 1 will be primarily supervised and regulated by its home authority.
The Bank has also issued a Policy Statement containing feedback to the responses relating to the Consultation Paper on this policy which ran from November 8 2021 to February 25 2022.
Under the Bank’s tiering approach, incoming CCPs will be assessed to establish the degree to which they might pose risks to UK financial stability. They will initially be triaged against the following indicators: i) whether the incoming CCP held at least £10bn of UK clearing member initial margin; ii) whether the incoming CCP held at least £1bn of UK clearing member default fund contributions; or iii) if the incoming CCP has an interoperability arrangement in place with a UK CCP. Incoming CCPs not meeting these indicators will usually not move forward to the next stage of the tiering assessment, and will be designated as Tier 1.
For incoming CCPs that meet one or both of the first two triage criteria, but not the interoperability criterion, the Bank will assess the proportion of total initial margin and default fund contributions attributable to UK clearing members (the ‘proportionality test’). Where both the initial margin and default fund contributions attributable to UK clearing members are below 20%, the Bank will undertake a Level 1 informed reliance assessment to determine if the Bank is able to place reliance on the incoming CCP’s home authority’s regulation and supervision.
Incoming CCPs that are below the proportionality test thresholds and where Level 1 informed reliance assessment expectations are met will be designated as Tier 1. For those incoming CCPs that are above the proportionality thresholds and/or for which the Level 1 informed reliance expectations have not been met, as well as for interoperable CCPs, the Bank will undertake a systemic risk assessment. This is to assess factors relating to the incoming CCP which are relevant to its systemic importance to the UK.
Incoming CCPs that are found to be not potentially systemic to UK financial stability will be designated Tier 1. For those CCPs which are found to be potentially systemic to UK financial stability, the Bank will undertake a Level 2 informed reliance assessment. Where the Bank’s expectations are met, the incoming CCP will usually be designated as Tier 1. Where expectations have not been met, the incoming CCP will usually be designated as Tier 2.
The implementation date of this policy will be Thursday 1 December 2022.
Policy Statement: The Bank of England’s approach to tiering incoming central counterparties under EMIR Article 25