The Bank of England’s fees regime for incoming central counterparties

Overview

This Bank of England (the Bank) Policy Statement (PS) provides feedback to responses to the Consultation Paper (CP), ‘The Bank of England’s fees regime for incoming central counterparties’. The final fees regime for non-UK central counterparties providing clearing services to clearing members or trading venues established in the UK (incoming CCPs) is confirmed in the Statement of Policy (SoP).

Feedback to responses

The Bank’s public consultation on the fees regime for incoming CCPs ran from 30 June 2022 until 15 September 2022. The Bank received five responses to the consultation. Having carefully considered these responses, as detailed below, the Bank is not making any changes to the proposals that were set out in the CP.

Background

Under the on-shored European Market Infrastructure Regulation (EMIR),^{footnote [1]} the Bank is required to ‘tier’ incoming CCPs based on the degree to which the CCP poses, or is likely to pose, risks 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) will become subject to direct UK supervision and regulation. An incoming CCP that is designated Tier 1 will be primarily supervised and regulated by its home authority.

The Bank’s approach to monitoring and/or supervising incoming CCPs will depend on the Bank’s assessment of the CCP’s systemic importance as well as the co-operation arrangements in place between the Bank and the CCP’s home authorities. The Bank will charge fees to an incoming CCP to reflect the work undertaken by the Bank to review the incoming CCP’s recognition application and undertake a comparable compliance assessment (where requested), and the level of monitoring and/or supervisory activity undertaken by the Bank following recognition.

As set out in the Bank of England’s approach to tiering incoming CCPs under EMIR Article 25, the Bank will undertake a two-stage process to identify whether an incoming CCP should be designated as a Tier 1 or Tier 2 CCP. Once the Bank has tiered an incoming CCP, the Bank will assess the CCP’s application for recognition. For all incoming CCPs, the Bank will need to verify, among other things, that the incoming CCP’s application contains the necessary information, that appropriate co-operation arrangements are in place with the CCP’s home authority and that the CCP is subject to effective supervision and enforcement by that home authority. For Tier 2 CCPs, the Bank will need to additionally assess, among other things, whether the CCP complies with the requirements set out in EMIR Article 16 and Titles IV and V.

Under EMIR Article 25a(1), a Tier 2 CCP (a ‘requesting CCP’) may submit a reasoned request that the Bank assesses whether, in the requesting CCP’s compliance with its home regulatory regime and taking into account any equivalence decisions made by HM Treasury (HMT) under EMIR Article 25(6), that requesting CCP may be deemed to satisfy compliance with the requirements set out in EMIR Article 16 and Titles IV and V. As set out in the Bank of England’s approach to comparable compliance under EMIR Article 25a, the Bank will grant comparable compliance to a requesting CCP for relevant areas of EMIR where the Bank considers equal or comparable supervisory outcomes are achieved through the applicable home regime.

In the CP, the Bank set out its proposals for levying recognition fees and annual fees on recognised incoming CCPs, pursuant to paragraph 36(1) of Schedule 17A to the Financial Services and Markets Act 2000 (FSMA) and Regulation 207 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019/632 (the 2019 Regulations). The CP specified the Bank’s proposals to levy fees:

(a) on incoming CCPs at the point of recognition (‘recognition fees’);

(b) on Tier 2 CCPs for the assessment of a comparable compliance application upon request (‘comparable compliance assessment fee’); and

(c) on recognised incoming CCPs for monitoring and/or supervision on an annual basis (‘annual fees’).

The Bank consulted on its proposals for the fees regime for incoming CCPs from 30 June to 15 September 2022. This PS provides the Bank’s response to feedback from consultation responses. The SoP confirms the final fees regime for incoming CCPs.

Implementation

The fees policy set out under the SoP will come into effect on 1 December 2022. For the avoidance of doubt, no fees will be levied on incoming CCPs unless and until they have been recognised by the Bank.

Bank response to consultation feedback

The Bank received five responses to the consultation, which included responses from CCPs and industry representative bodies. Respondents touched on a number of themes, with a particular focus on the proposed level of annual fees and the flat recognition fee. The Bank has given careful consideration to all respondent feedback, and has decided to retain all proposals set out in the CP. This PS provides a summary of responses under each theme, and the Bank’s response to stakeholder feedback. The final fees regime is confirmed in the SoP.

The principle of levying fees

Some respondents questioned the principle of charging incoming CCPs for the full cost of recognition and monitoring and/or supervision. The US, Japan and Switzerland were cited as examples of jurisdictions that do not levy fees on incoming CCPs.

As a global centre for derivatives trading and clearing, the UK plays an important role in keeping markets stable, efficient and open. Incoming CCPs are also important in supporting financial stability, both in the UK and globally. Incoming CCPs which are recognised by the Bank are able to provide clearing services to UK clearing members and trading venues and the Bank considers it is reasonable and proportionate to levy fees in order to recover the costs of its monitoring and supervision of these CCPs.

The principle of charging incoming CCPs to recover the costs of recognition and supervision is in accordance with the Bank’s statutory and regulatory powers.^{footnote [2]} It is also consistent with the Bank’s approach to the recognition and supervision of UK CCPs and other financial market infrastructures which are subject to the Bank’s supervision. Further, in the UK, it is standard practice for regulators to recover the costs of regulation through the levying of fees on the entities they regulate. For example, the Financial Conduct Authority is entirely funded through the fees it charges to regulated firms.^{footnote [3]}

It should also be noted that there are many other jurisdictions with fee regimes in place and therefore the Bank does not consider its approach to be out of step with global practice.

Recognition fee

Consultation respondents commented that the CP had not provided sufficient explanation to support the increase in the flat recognition fee for all incoming CCPs from £35,000 to £50,000, with one respondent suggesting that the fee should not increase. Two respondents were of the view that the cost to the Bank of providing information or advice which HMT considers necessary to enable it to decide whether to make an equivalence determination in accordance with EMIR Article 25(6) should not be included in the recognition fee.

The recognition fee is based on the Bank’s updated estimates of the resourcing costs for assessing and processing recognition applications. The previous £35,000 fee was based on the Bank’s cost estimates in 2018. Since then, the Bank has developed its approach to recognising and supervising incoming CCPs, and the revised recognition fee of £50,000 reflects the Bank’s understanding of the work involved in light of these developments. This includes the introduction of a tiering framework (underpinned by EMIR), agreeing co-operation and information sharing arrangements with the relevant home authorities, and the provision of technical advice on equivalence to HMT.

Under EMIR Article 25(6), HMT is responsible for making regulations determining, among other things, that an incoming CCP complies with legally binding requirements under its home regime which are equivalent to those specified in Title IV of EMIR and that the incoming CCP is subject to effective supervision and enforcement by its home authority on an ongoing basis. In accordance with EMIR, the Bank may provide technical advice on equivalence to HMT in support of HMT’s equivalence assessment. A determination of equivalence by HMT, in line with EMIR Article 25(6), is a pre-condition for the Bank recognising an incoming CCP. As the work the Bank undertakes to develop technical advice is generated by recognition applications from incoming CCPs, it is appropriate for the Bank to recover the cost of providing such equivalence advice as part of its recognition fee.

Supplementary recognition fee for Tier 2 CCPs

Some consultation respondents felt that the proposed supplementary recognition fee for Tier 2 CCPs was high, with one observing that the information required for the recognition application is similar to the information required for Tier 1 CCPs. In addition, some respondents took the view that CCPs would prefer certainty about the level of the fee to support their budgeting processes.

The supplementary recognition fee for Tier 2 CCPs is an additional fee charged on a cost-recovery basis to each Tier 2 CCP; it will be calculated to cover any costs incurred by the Bank in assessing that CCP’s recognition application which are in excess of the base recognition fee.

Pursuant to EMIR Article 25(2b), where the Bank determines an incoming CCP to be Tier 2, the Bank will only recognise that incoming CCP where it meets an additional set of conditions. This includes the incoming CCP complying with, at the moment of recognition and thereafter on an ongoing basis, the requirements set out in EMIR Article 16 and Titles IV and V. The process of assessing whether an incoming CCP meets the additional conditions requires additional Bank resource and, accordingly, the Bank will charge fees to recover the costs that it incurs in this additional process. However, the amount of additional Bank resource required (and, by extension, the costs incurred by the Bank) will vary depending on the specific circumstances of an incoming CCP’s application. The £150,000 estimate provided in the CP is based upon the Bank’s estimated costs of the additional work required to review a Tier 2 CCP’s recognition application, though this may be lower or higher for a particular Tier 2 CCP.

Annual fees

All respondents considered the proposed annual fee for fee Group D (£9,000) to be reasonable. The annual fee estimates for fee Groups A (£1.2 million), B (£300,000) and C (£90,000) were viewed to be high in comparison to supervisory fees levied globally.

The Bank recognises that supervisory approaches and related costs vary across jurisdictions. The Bank’s approach to incoming CCPs is built upon the principle of deference to other regulators’ regimes – where justified – while ensuring the financial stability risks to the UK are adequately managed. The Bank’s approach is proportionate to the level of risk an incoming CCP brings to UK financial stability and the sufficiency of our relationship with the relevant home authority.

The Bank’s annual fee groups for incoming CCPs are based upon the Bank’s approach to tiering (Figure 1 below) and reflective of the extent of supervisory activity which will be applied to each group:

• In accordance with the Bank’s tiering policy, where: (i) the Bank assesses an incoming CCP to be potentially systemically important for UK financial stability at stage 2 of the tiering process (as set out in Figure 1); and (ii) the Bank’s co-operation and information sharing expectations with the incoming CCP’s home authority have not been met, the CCP will be designated as a Tier 2 CCP. A Tier 2 CCP will be subject to direct supervision by the Bank and accordingly will be allocated to fee Group A. The corresponding estimated annual fee of £1.2 million reflects the anticipated supervisory cost expected to be associated with directly supervising a systemic incoming CCP. It is broadly comparable to the annual fees charged by the Bank to UK-based CCPs categorised as ‘Category 2’ (significant systems which have the capacity cause some disruption to the financial system).^{footnote [4]}
• Where an incoming CCP has moved past the initial triage stage of the tiering process (as set out in Figure 1), but the Bank’s co-operation and information sharing expectations with the incoming CCP’s home authority have been met (in line with the expectations set out in the Informed Reliance Assessment),^{footnote [5]} the CCP will be allocated to fee Group B or fee Group C. Which of these groups the CCP is allocated to will depend upon the level of Informed Reliance Assessment the CCP is subject to (Level 2 for Group B and Level 1 for Group C).

The Bank must be able to rely on the CCP’s home authority on an ongoing basis. Accordingly, the corresponding annual fees for CCPs in Groups B and C reflect the supervisory costs associated with the Bank maintaining effective supervisory co-operation arrangements with the CCP’s home authority.

• Where an incoming CCP has not moved past the initial triage stage of the tiering process (ie is not considered to be potentially systemic to UK financial stability) the CCP will be allocated to fee Group D. The Bank expects that a large proportion of CCPs currently in the temporary recognition regime are likely to be allocated to fee Group D (though each incoming CCP’s individual allocation will be determined by the Bank in accordance with its tiering policy and the SoP on the fees regime for incoming CCPs).

Figure 1: Summary of the Bank’s approach to tiering incoming CCPs

Comparable compliance assessment fee

One respondent asked for clarity on how a comparable compliance assessment would benefit a CCP. Another respondent felt that a CCP should not be required to cover the cost of the assessment in the case where the Bank does not grant comparable compliance.

As set out in the Statement of Policy on the Bank’s approach to comparable compliance under EMIR Article 25a, a comparable compliance assessment is only applicable to Tier 2 CCPs (where requested by the CCP) as Tier 2 firms will be subject to the Bank’s direct supervision. Where a Tier 2 CCP has requested the Bank undertake a comparable compliance assessment, the Bank will assess whether in its compliance with the applicable home regime and taking into account the provisions of the regulations made under EMIR Article 25(6), the CCP may be deemed to satisfy compliance with EMIR Article 16 and Titles IV and V.

The Bank will grant comparable compliance to a Tier 2 CCP for specific areas where the Bank considers comparable supervisory outcomes are achieved through the home regime. Where comparable compliance has been granted, the Bank will defer to the home authority for these specific areas and would not expect to engage in independent direct supervision of those specific areas.

As the Bank would undertake the same amount of work in undertaking a comparable compliance assessment regardless of whether or not comparable compliance is granted, and an assessment will only be conducted at an incoming CCP’s request, it is appropriate for the Bank to recover the cost of any such assessment.

Extension of services by recognised incoming CCPs

Some consultation respondents requested clarity as to whether a recognised incoming CCP would need to request authorisation from the Bank for the extension of its services, and therefore be subject to additional fees.

Tier 1 CCPs will not need to request authorisation from the Bank for the extension of its services, though the Bank may engage with the home authorities of Tier 1 CCPs to understand the extension of services and potential impact on UK financial stability. Tier 2 CCPs are directly supervised by the Bank and therefore, pursuant to EMIR Article 15(1), where the Tier 2 CCP wishes to extend its business to additional services or activities not covered by the initial authorisation it must submit a request for extension to the Bank.

The anticipated costs associated with the activities described above were incorporated in the estimated annual fees for Groups A, B and C in the CP; eg the £300,000 estimated annual fee for Group B CCPs assumed an anticipated number of service extensions, and associated engagement with home authorities. The annual fees ultimately payable by incoming CCPs will reflect the actual number of service extensions from incoming CCPs in the relevant fee year. As such, if there are no service extensions then the actual fees charged may be lower than the estimated fees, subject to the Bank’s wider supervisory activity in relation to incoming CCPs within that fee year. There is no cost to Group D CCPs for an extension of services (ie the annual fee is fixed and would not increase from an extension of services).

If the extension of services leads to a change in the CCP’s risk profile in relation to UK financial stability, the Bank will review the existing tiering decision and this may mean that the CCP could be reallocated to a higher fee group (for example, from Group D to Group C) in subsequent years.

Timings of the annual fee cycle in future fee years

Consultation respondents raised the issue of the predictability of fees, noting that CCPs require timely confirmation of fee levels in line with their budget management processes.

The Bank recognises the need for CCPs to have information about the annual fee level as early in the fee year as practicable. The Bank’s fee year for incoming CCPs will, as for other financial market infrastructures, run from 1 March to the end of February, in line with the Bank’s annual budgeting cycle. It is the Bank’s intention to consult on the annual fees for each fee year by the end of June of that fee year, in line with existing practice for other financial market infrastructures. Proposed fee levels at consultation will give incoming CCPs a reasonable understanding of likely fee levels for that fee year, and provide an opportunity for CCPs to feed back on the Bank’s proposals. Following the consultation, fees will be finalised and invoiced by the end of Q3 (ie November) of that fee year.

Statement of Policy on the fees regime for incoming central counterparties

Base recognition fee – all incoming CCPs

The base recognition fee, payable by all incoming CCPs, is £50,000. This fee is payable once an incoming CCP has been recognised and will not be levied should the application for recognition be unsuccessful or withdrawn.

Supplementary recognition fee – Tier 2 CCPs only

The supplementary recognition fee is payable by Tier 2 CCPs. The amount is specific to each Tier 2 CCP and will be based upon the costs incurred by the Bank in assessing that CCP’s recognition application which are in excess of the base recognition fee. The incoming CCP will be invoiced for this supplementary fee, alongside the base recognition fee, when the recognition decision is made. As with the base recognition fee, the supplementary recognition fee will not be payable should the application for recognition be unsuccessful or be withdrawn.

Comparable compliance assessment fees for Tier 2 CCPs

The comparable compliance assessment fee, payable by a Tier 2 CCP when it makes a reasoned request for a comparable compliance assessment under EMIR Article 25a(1), is £30,000.

Comparable compliance assessment fees are payable at the later of either the point of the requesting CCP’s recognition or, if the comparable compliance decision is made post-recognition, at the point at which the comparable compliance decision is made. Where the requesting CCP is recognised by the Bank, the comparable compliance assessment fee will be payable even when equal or comparable outcomes are not identified, or if the request for comparable compliance is withdrawn. However, if the requesting CCP has not been granted recognition, or its application for recognition has been withdrawn, no comparable compliance assessment fee will be payable by the requesting CCP.

Annual fees

Incoming CCP fee groups and fee methodology

Incoming CCPs will be placed into one of four fee groups (A to D), based on the anticipated level of monitoring and/or supervisory activity that will be undertaken by the Bank. The level of supervisory activity applied is determined by the outcome of the tiering process:

• Incoming CCP Group A – incoming CCPs designated as Tier 2 and subject to direct supervision by the Bank.
• Incoming CCP Group B – incoming CCPs designated as Tier 1 and subject to Level 2 informed reliance monitoring activity.
• Incoming CCP Group C – incoming CCPs designated as Tier 1 and subject to Level 1 informed reliance monitoring activity.
• Incoming CCP Group D – incoming CCPs designated as Tier 1 and not subject to informed reliance monitoring activity.

Each incoming CCP’s fee group allocation (and any changes thereto) will be confirmed to it by the Bank upon recognition and, thereafter, on an annual basis (or more frequently if appropriate), separate to any reviews of the Bank’s tiering decision. Where an incoming CCP is subject to monitoring and/or supervisory activity significantly above or below that which would normally be expected of its group allocation, the Bank may subsequently reallocate that incoming CCP to a different group for the next fee year.

The methodology for each fee group is as follows:

(a) A flat fee for Incoming CCP Group D, reviewed annually.

(b) Fees for Incoming CCP Groups A, B and C will be estimated based on expected monitoring and/or supervisory activity, and then applied on a cost recovery basis, in aggregate, by making a final adjustment, where applicable, at the end of each fee year via a rebate or invoice for additional fees. All incoming CCPs within the same group will be charged the same fee, with higher fees payable by CCPs in Group A and progressively lower fees payable by CCPs in Groups B and C. The relative fees charged for each group will be calculated by means of a pre-determined ratio, reflecting the Bank’s calculation of the relative level of monitoring and/or supervisory activity undertaken in respect of each group.

The Bank will calculate fees annually by i) calculating the total cost for the incoming CCP fee block via the budget allocation process; ii) subtracting from that the revenue from the flat fees payable by Group D; and iii) allocating the remaining cost across Groups A to C by means of the fee ratio.

Fee ratios and fees for 2022/23 fee year

The ratios for costs across the incoming CCP Groups A to C, and fee amounts for the 2022/23 fee year are shown in Table A below.

Table A: Fee rations and fees for 2022/23 fee year

Annual process for setting and levying fees

In subsequent years, the annual fees for incoming CCPs will be set on the same cycle as other financial market infrastructure fees. This means that there will be a consultation on proposed fees as early as practicable in the fee year. The fee year runs from 1 March to end-February, the consultation will normally published by early summer, and fees will be finalised and invoiced by the end of Q3 of the fee year.

An incoming CCP will only become subject to annual fees after it has been recognised. An incoming CCP obtaining recognition part-way through the fee year will be charged annual fees on a pro-rata basis from the point of its recognition until the end of that fee year. These annual fees will be in addition to recognition fees and, where applicable, any comparable compliance assessment fee.

If it appears to the Bank that, in relation to any fee, in exceptional circumstances relating to a particular case, it would be inequitable to require fees or to retain sums previously paid, it may at its discretion:

• waive the payment;
• reduce the amount payable; or
• offer a whole or partial refund of sums already paid.