The Bank of England’s power to direct a central counterparty to address impediments to resolvability

1: Overview

Introduction

1.1. This Consultation Paper (CP) sets out the Bank of England’s (the Bank’s) proposed policy for exercising its power to direct a central counterparty (CCP) to address impediments to effective exercise of the stabilisation powers (resolvability) under paragraph 2, Schedule 11 to the Financial Services and Markets Act 2023 (Schedule 11). The Bank’s power of direction applies to UK-based central counterparties (CCPs). This power does not apply to third-country CCPs offering services in the UK.

1.2. The Bank also has a new power to direct a parent company of a CCP to establish a separate holding company in specific circumstances, if the CCP is a subsidiary of a company incorporated in the UK.

1.3. This CP is therefore most relevant to UK-based CCPs and their parent companies, if the parent company is incorporated in the UK, as parties which could be subject to directions given by the Bank.

1.4. The Bank is the United Kingdom’s resolution authority for CCPs^{footnote [1]} and the power to direct CCPs to address impediments to resolvability is a new power conferred upon the Bank by the Financial Services and Markets Act 2023 (FSMA 2023). The purpose of this CP is to describe the context of the new power and to consult on the Bank’s draft statement of policy (SoP) ‘The Bank’s power to direct a CCP to address impediments to resolvability’, as set out in the appendix.

1.5. The proposed SoP sets out the process for the giving of directions, the types of impediments to which the power may apply and the Bank’s approach to the use of the power in the context of its statutory stabilisation objectives.

1.6. This CP does not consult on the power itself as this is set and conferred upon the Bank by Schedule 11. The Bank would like to invite views on its proposed approach to exercising the power as outlined below and in the draft SoP.

2: Background

2.1. A core feature of a stable financial system is that systemically important financial institutions must be ‘resolvable’, meaning that it is feasible and credible to place such institutions into resolution without excessive disruption to the financial system, interruption to the provision of critical economic functions, or exposing public funds to losses. To achieve this, the authorities need to have an appropriate set of tools and powers to ensure that such institutions are organised and operate in a manner that facilitates effective resolution.

2.2. CCPs play a key role in the financial system. Accordingly, UK CCPs are subject to close and continuous supervision by the Bank of England which aims to ensure that their risk management and resilience frameworks enable them to carry out their vital functions in normal times and during periods of stress. Despite the UK CCPs’ resilience, and the tail risk nature of CCP resolution scenarios, clear and robust recovery and resolution arrangements are essential to ensure that CCPs and authorities can respond effectively to periods of extreme stress.

2.3. The Financial Stability Board’s (FSB’s) international standard for the Key Attributes of effective resolution regimes states that home authorities of Financial Market Infrastructures (FMIs) that are systemically important in more than one jurisdiction should maintain a Crisis Management Group (CMG) with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis.^{footnote [2]} This includes coordinating the resolvability assessment of a CCP.

2.4. Under this standard, all systemically important FMIs should also be subject to regular resolvability assessments in accordance with the FSB’s Key Attribute 10 and the FMI Annex. This includes review of the technical and legal barriers to the transfer of the critical functions of the FMI to another entity and the impact of resolution strategies on FMI participants and on any linked FMIs.^{footnote [3]} FSB standards also set the expectation that the appropriate authorities for FMIs should have powers to require an FMI to adopt measures consistent with the legal framework to improve the resolvability of the FMI.

3: Use of the Bank’s power to direct a CCP to address impediments to resolvability

3.1. Section 2 of the SoP sets out how the Bank generally expects to use its power, including that it will gather information from each CCP on its arrangements with respect to the implementation of stabilisation powers.

3.2. When assessing resolvability, the Bank expects to consider all relevant matters, including for example, the feasibility of using resolution tools in such a way which meets the resolution objectives. For the purposes of assessing resolvability, the Bank will not assume that the CCP will be in receipt of any: extraordinary public financial support; emergency liquidity assistance; or any other liquidity assistance provided by the Bank under non-standard collateralisation, tenor and interest rate terms. This assumption is intended to ensure that CCPs are resolvable without reliance on public funding or access to the Bank’s liquidity facilities beyond business-as-usual arrangements.

3.3. Where the Bank identifies an impediment to the effective deployment of its stabilisation powers, it would generally seek to engage with the relevant CCP to gather information on the impact of the impediment and discuss potential remedial measures. If, following such discussions, the CCP agrees to take action to address the identified impediment in a way that satisfies the Bank’s concerns, then use of the Bank’s powers to direct will not be required.

3.4. If the Bank identifies an impediment which cannot be addressed effectively through engagement with the CCP, the Bank will provide the CCP with a reasonable period of time of generally four months to develop and propose remedial measures. The Bank will consider the complexity and practicalities of the impediment and any proposed remedial measures in determining what amount of time is reasonable and proportionate in each specific case. This period of time relates to the development of proposed remedial measures only.

3.5. The amount of time that a CCP would have to implement the measures would depend on the nature of the measures themselves. If the Bank considers that the measures are insufficient or no proposal is received, the Bank may use its power to direct the CCP to take measures to address impediments to the effective exercise of the stabilisation powers. In this case, the CCP may be required to prepare a plan showing how it will achieve the measures required by the Bank. The Bank would generally provide the CCP with one month to submit such a plan to the Bank.

3.6. In exceptional circumstances, the Bank may consider it proportionate to require the CCP to take remedial measures on an expedited or urgent basis and may provide less than four months for the development of remedial measures. This flexibility is intended to ensure that the Bank is able to use its powers to respond appropriately to potential risks. These risks may reflect events in the market or developments at the CCP such that, in the Bank’s assessment, allowing the impediment to continue would pose significant risks to financial stability.

3.7. As set out in paragraph 3, Schedule 11 the CCP will have a reasonable period of time to make representations to the Bank about any direction.

4: The Bank’s objectives in requiring a CCP to address impediments to resolvability

4.1. For resolution to be feasible and credible, the Bank requires each UK CCP to be organised in a way that facilitates the effective use of the Bank’s stabilisation powers with regard to the CCP. This may require, for example, ensuring that information essential to the Bank’s monitoring and resolution decision-making can be provided on a timely basis; or the simplification of any elements of the CCP’s legal or operational structures where their complexity or opacity could pose a potential barrier to an orderly and effective resolution in the unlikely event of their failure. The Bank will work with CCPs to ensure that any impediments to an orderly resolution presented by the CCP’s arrangements are addressed. The Bank’s work to assess the resolvability of a CCP will form a key part of resolution planning on a ‘business-as-usual’ basis.

4.2. The Bank may exercise its power of direction to require a CCP to take measures to address impediments to the effective exercise of the Bank’s stabilisation powers. When determining whether to take this action, the Bank will consider the extent to which a relevant matter could impede the ability of the Bank to advance one or more of the special resolution objectives through the exercise of the stabilisation powers. This is consistent with the Bank’s duty under paragraph 17, Schedule 11 to have regard to the special resolution objectives in using, or considering the use of, those powers or procedures.

4.3. In summary, these objectives are as follows:

• Objective 1 is to protect and enhance the stability of the UK financial system, including in particular by:
  • preventing contagion (including contagion to market infrastructures), and
  • maintaining market discipline.
• Objective 2 is to protect and enhance public confidence in the stability of the UK financial system.
• Objective 3 is to maintain the continuity of central counterparty clearing services.
• Objective 4 is to protect public funds.
• Objective 5 is to avoid interfering with property rights in contravention of a Convention right (within the meaning of the Human Rights Act 1998).

4.4. Before giving directions under this paragraph the Bank is required by FSMA 2023 to have regard to the potential impact of the direction on:

• the CCP or entity in question;
• the market for financial services within the United Kingdom; and
• the financial stability of the United Kingdom.

4.5. Section 3 of the SoP sets out a non-exhaustive list of illustrative examples of possible scenarios in which the Bank may consider exercising its power of direction. This includes scenarios with respect to the CCP’s legal and operational arrangements, continuity of contracts in resolution, and information systems and data requirements. The Bank considers that CCPs should be able to demonstrate their readiness to support a resolution in their arrangements, including capabilities in these key areas. The Bank plans to set out in due course how, as resolution authority, it intends to assess individual CCP’s resolvability, and the resolvability outcomes it deems necessary to support resolution, which may inform the Bank’s use of the power in future.

5: Interaction of the Bank’s powers as resolution authority and as supervisor to address impediments to resolvability

5.1. The Bank is the resolution authority for UK CCPs. It is also a supervisory authority for UK CCPs. There is a functional separation within the Bank, including separate governance structures, for its responsibilities with respect to CCP resolution and FMI supervision.

5.2. In addition to the power described in the SoP, the Bank as supervisory authority also has supervisory powers (including rule-making powers) to require CCPs to take an action, or not take an action, where there is a financial stability rationale for such a requirement. These are set out in sections 296A and 55L of the Financial Services and Markets Act 2000.^{footnote [4]} These are broad powers, which may be used to effect improvements to the resilience of specified financial market infrastructure (including CCPs). This supports the Bank’s general objective to protect and enhance the stability of the financial system in the UK by, among other things, seeking to maintain public confidence in the stability of the UK financial system.

5.3. The Bank has distinct statutory objectives as resolution authority and as supervisory authority, and these sets of objectives govern the use of the Bank’s respective powers. The relevant functions within the Bank (including FMI supervision and Resolution) will coordinate to ensure that the most proportionate and appropriate power is used to achieve these respective objectives.

5.4. Section 4 of the SoP sets out the Bank decision-making in relation to its CCP resolution and CCP supervisory powers. This is guided by complying with international standards in relation to operational independence of the resolution authority, and sound governance. There will also be close co-operation between the supervisory and resolution functions in relation to resolution activities, including in relation to any prospective or actual usage of the power to remove impediments to CCP resolvability. The Bank will ensure that CCPs receive co-ordinated communications from the Bank on resolution matters.

6: Questions being consulted on

6.1. The Bank invites feedback on the proposals set out in this consultation, including on the following questions.

• Do respondents have any views on the process for the Bank’s use of its power to direct a CCP to address impediments to resolvability?
• Do respondents have any views on the timing for the Bank’s use of its power to direct a CCP to address impediments to resolvability?
• Do respondents have any views on the respective timescales for engagement once the Bank identifies any impediment to resolvability or uses its power to direct a CCP to address them?

The Bank would welcome responses by 18 October 2024. Please provide these by email to: CCP.Resolution@bankofengland.co.uk. Alternatively, please address any comments or enquiries to: Resolution Directorate, Bank of England, Threadneedle Street, London, EC2R 8AH.

7: Implementation and Next Steps

7.1. The Bank intends to publish the final SoP after it has considered and, where appropriate, reflected any comments in response to this consultation. The Bank proposes that the final SoP enter into effect upon publication.

7.2. The Bank intends to develop a framework for resolvability assessment of UK CCPs consistent with international standards, and to engage with stakeholders in due course. The new power of direction enables the Bank as resolution authority to direct a CCP to take measures to mitigate impediments to resolvability that may be identified, either within such a future resolvability assessment framework or through other work performed by the Bank.

Appendix

• The Bank of England’s power to direct a CCP to address impediments to resolvability

  Statement of Policy

  This Statement of Policy is issued by the Bank of England (the Bank), as the UK resolution authority for central counterparties (CCPs), under paragraph 3(9) Schedule 11 to the Financial Services and Markets Act 2023 (Schedule 11).^{footnote [5]} This document contains the Bank’s policy for exercising its power to direct a CCP to address impediments to the effective exercise of the stabilisation powers (i.e. to the resolvability of the CCP).

  1: Background

  1.1. This Statement of Policy (SoP) sets out how the Bank expects to use its power to direct a CCP to address impediments to resolvability. This power is conferred by paragraph 2, Schedule 11. Schedule 11 requires the Bank to publish a statement of its policy with respect to giving directions under this power. This power does not apply to third-country CCPs offering services in the UK.

  1.2. The Bank also has a new power to direct a parent company of a CCP to establish a separate holding company in specific circumstances, if that CCP is a subsidiary of a company incorporated in the UK.^{footnote [6]}

  1.3. This SoP is therefore most relevant to:

  • UK-based CCPs; and
  • parent companies of CCPs which are incorporated in the UK.

  as parties which could be subject to directions given by the Bank.

  1.4. The SoP is set out as follows. Section 2 describes the statutory framework of the power. Section 3 sets out the Bank’s approach to giving directions under the power. Section 4 sets out the decision-making process that the Bank will follow to give directions and Section 5 describes the right of CCPs to appeal.

  2: Statutory framework

  Process leading up to the use of the Bank’s power

  2.1. The process for the use of the Bank’s power is set out in paragraphs 2 and 3 of Schedule 11. The Bank may give direction to remove an impediment to the effective exercise of its stabilisation powers.

  2.2. Under paragraph 2(4) of Schedule 11, before giving a direction, the Bank must have regard to the potential impact of the direction on:

  a. the CCP or entity in question;
  b. the market for financial services within the United Kingdom; and
  c. the financial stability of the United Kingdom.

  Use of the Bank’s power where an impediment is identified

  2.3. The Bank intends to assess the resolvability of each CCP within scope of the special resolution regime. The purpose of the assessment is to consider whether it would be feasible and credible to place a CCP into resolution and to implement the stabilisation options that would be effective to achieve the special resolution objectives.^{footnote [7]} The Bank would expect to gather information from each CCP on their arrangements with respect to the implementation of stabilisation powers to make this assessment. The Bank’s work to assess the resolvability of a CCP will form a key part of resolution planning on a ‘business-as-usual’ basis before a CCP encounters distress.

  2.4. When assessing resolvability, the Bank expects to consider all relevant matters. This could include, for example, the feasibility of using resolution tools in such a way which meets the resolution objectives, including whether it would be able to effectively implement the statutory stabilisation options relevant to potential resolution scenarios. The Bank will assume that the CCP will not be in receipt of any: extraordinary public financial support; emergency liquidity assistance; or any other liquidity assistance provided by the Bank under non-standard collateralisation, tenor, and interest rate terms. The Bank expects to assess the resolvability of CCPs regularly.

  2.5. The Bank would expect to inform the CCP of any identified impediments and discuss how to address these. After this, if the Bank considers that the use of its power is appropriate, the Bank will inform the CCP of any identified impediments to resolvability, give reasons for the determination, and set out measures to remove the impediments. As a matter of policy, the Bank would generally envisage using this power where it considers that the impediment is material however it may choose to use this power in respect of any impediment. The Bank will then provide the CCP with a reasonable period of time of generally four months to make its own proposal to remove the identified impediments to resolvability.

  2.6. If the Bank concludes that the CCP’s proposal is insufficient or no proposal is received, the Bank may use its power to direct the CCP to take measures to address impediments to the effective exercise of the stabilisation powers. The Bank must have regard to the factors set out in paragraph 2.2 above.

  2.7. After the Bank has exercised its power to make a direction, the CCP may be required to prepare a plan showing how it will achieve the measures required by the Bank. The Bank would generally provide the CCP with one month to submit a plan to the Bank. This one-month period applies where the Bank considers the CCP’s prior remedial measures to be insufficient, or where none are proposed. The Bank will consider the complexity of the measures, including any dependencies with other entities or systems, in setting this time.

  2.8. For the purposes of assessing the CCP’s proposals and determining remedial measures, the Bank expects to take account of factors including: (i) the threat to financial stability posed by the impediments; and (ii) the likely effect of the remedial measures on: (a) the CCP or entity in question, (b) the market for financial services within the United Kingdom, and (c) the financial stability of the United Kingdom.

  2.9. In exceptional circumstances, the Bank may consider it necessary and appropriate to direct the CCP to take certain measures to address impediments to the effective exercise of the stabilisation powers on an expedited or urgent basis. In these circumstances, the Bank may provide less than four months for the development of remedial measures. The Bank would do so only if, in the Bank’s assessment, allowing the impediment to continue would pose significant risks to financial stability. For example, this may occur during contingency planning, when the Bank is preparing to respond to an emergency event and considers it appropriate to direct the CCP to address an impediment if the CCP is potentially to be placed into resolution.

  2.10. Where the Bank gives a direction in such circumstances, it will provide a notice with information as required by paragraph 3(1) of Schedule 11. The direction may take effect immediately or on a later date specified in the direction. This will reflect the Bank’s assessment of what is proportional to the complexity of the measures to remove the identified impediment and the impact of the impediment on resolvability. In such circumstances, the CCP may be requested to submit a plan to the Bank detailing how it will achieve the measures in a period of less than one month.

  Process for giving a direction

  2.11. Bank directions must be in writing and may be given with general effect or with respect to a particular CCP or class of CCPs. Paragraph 2, Schedule 11 provides that the power includes, but is not limited to, a power to direct a CCP:

  a. to enter into or revise an agreement for the provision of services relating to the provision of critical clearing services;
  b. to limit its maximum individual and aggregate exposures to loss;
  c. to produce information which is relevant to the exercise of the stabilisation powers, and to provide that information to the Bank;
  d. to dispose of specified assets;
  e. to cease carrying out specified activities, or observe restrictions in relation to the carrying out of specified activities;
  f. to cease the development of new or existing business operations, or observe restrictions in relation to the development of such operations;
  g. to make specified changes to its recovery plan, rules, or contractual arrangements;
  h. in order to ensure that it is possible for the performance of critical clearing services to be legally or operationally separated from the performance of other functions:

  I. to change its legal or operational structure, or
  II. so far as it is able to do so, to change the legal or operational structure of a subsidiary;

  i. to change its operational and financial arrangements so as to separate specified classes of assets from other specified classes of assets;
  j. to restrict netting sets in relation to specified classes of assets;
  k. to establish a parent company in the United Kingdom.

  2.12. The Bank also has a power to give directions to a parent company where a CCP is a subsidiary of a company incorporated in the United Kingdom. Such a direction may require the parent company to establish a separate holding company as a parent of the subsidiary for the purpose of:

  a. facilitating the exercise of the stabilisation powers; or
  b. ensuring that the exercise of a stabilisation power does not have an adverse effect on any other entities in the group.

  2.13. A direction by the Bank must be accompanied by a notice which: (i) states when the direction takes effect; (ii) gives the Bank’s reasons for giving the direction; and (iii) specifies a reasonable period within which the CCP may make representations to the Bank about the direction.

  2.14. The Bank must demonstrate how the remedial measures it proposes will adequately address the impediments in a manner proportionate to the burden or restriction imposed by the direction. As is the case with any public body in the exercise of its functions, the Bank will have regard to restrictions and conventions of public law, in particular the requirement for the authorities to act reasonably and to have respect for the rule of law and the principle of legal certainty. The Bank must also act in accordance with common law principles of procedural fairness when exercising its power of direction.

  2.15. If a person fails to comply with a direction given under paragraph 2, Schedule 11, remediation will be sought through the general enforcement powers contained in paragraph 136 of Schedule 11, which may include one or more of the following:

  a. publication of a statement to that effect;
  b. imposition of a penalty in respect of the failure of such amount that the Bank considers appropriate;
  c. direction to refrain from any conduct, with a view to ensuring that the failure ceases or is not repeated or the consequences of the failure are mitigated; and
  d. prohibition of specific persons from holding an office or position involving responsibility for taking decisions about the management of a named CCP, a CCP of a specified description or any CCP.

  3: The Bank’s approach to using the power of direction under paragraph 2, Schedule 11

  3.1. The Bank will exercise the power of direction when required to address impediments to the effective exercise of the stabilisation powers. When determining what constitutes ‘effective’ exercise of the stabilisation powers for these purposes, the Bank will have regard to the stabilisation powers it would expect to use in default loss and non-default loss resolution scenarios and the extent to which the impediment identified would prevent or reduce its ability to achieve the special resolution objectives.

  3.2. The Bank will endeavour to respond within a reasonable period to a CCP’s proposals for remedial measures or to a CCP’s representations in relation to the direction given by the Bank. Should more than one impediment to resolvability have been identified by the Bank, the Bank will prioritise the different impediments to resolvability and may require the CCP to follow a staged approach, where the most material impediments are addressed first.

  3.3. Directions will include a timeframe by which the identified impediments to resolvability must be addressed. The period of time allowed may vary, taking into account the materiality of the impediment and the complexity of possible remedial actions. The Bank will oversee the CCP’s progress and may choose to make its directions public, if appropriate and depending on the circumstances at the time.

  3.4. Paragraph 2(2) of Schedule 11 identifies a non-exhaustive set of examples of directions that the resolution authority may seek to make. In addition, the non-exhaustive list below provides further illustrative examples of possible scenarios in which the Bank may consider exercising its power of direction:

  Legal and operational arrangements to support effective deployment of resolution tools

  a. Where the CCP lacks legal and operational arrangements to support effective deployment of stabilisation options. This may include where contractual arrangements with clearing members or other FMIs are likely to hinder the Bank’s ability to deploy resolution tools to maintain continuity of clearing services.
  b. Where more information is required to assess the CCP’s potential liquidity needs in different resolution scenarios, including a breakdown by currencies, legal entities, business lines, intraday needs and location of collateral across the group.

  Continuity of contracts in resolution

  a. Where action is required to ensure continuity of contracts in resolution, including continuity of operational services (whether provided within the group or by third parties), of trading agreements and of access to payment services and other financial market infrastructures.

  Information systems and data requirements

  a. Where action is required to ensure that there are systems in place that would support the production of a rapid and effective valuation for the purposes of resolution, and that the CCP’s valuation systems, process, controls, and resources are aligned to support the CCP’s resolution strategy in different resolution scenarios.
  b. Where a CCP’s information systems and data availability do not ensure that the CCP is able to produce required resolution-related data quickly and accurately, and/or that the Bank has access to information necessary to implement potential resolution strategies in different scenarios.

  3.5. Where the Bank decides to exercise its power under paragraph 2(3), Schedule 11 with respect to a parent company where a CCP is a subsidiary of a company incorporated in the United Kingdom, it will apply the process as outlined above.

  4: Decision making

  4.1. All decisions made by the Bank as resolution authority for UK CCPs, including the exercise of the power to direct CCPs to address impediments to resolvability, will be taken in accordance with the Bank’s resolution decision-making structures. Decisions on the use of the Bank’s resolution powers will be taken by the Governor, the Deputy Governor responsible for resolution, or the Executive Director, Resolution (or their delegates), as appropriate and, where applicable, as advised by the Bank’s advisory committees.

  4.2. Before deciding to exercise its power to give direction to a CCP, the Bank, as resolution authority, will consult with the relevant supervisory areas at working and senior levels within the Bank.^{footnote [8]}

  4.3. Once the Bank has reached a final decision, the Bank will co-ordinate with the relevant parties on issues pertaining to resolvability. The Bank’s power to direct a CCP to address an impediment to resolvability exists alongside the Bank’s supervisory powers of direction.^{footnote [9]} These supervisory powers remain available to the Bank (as CCP supervisor) to exercise in order to advance the Bank’s primary objective to protect and enhance the stability of the financial system in the UK, where the respective conditions of their use are met.^{footnote [10]}

  4.4. Where there are common impediments affecting more than one CCP, the Bank could give a direction with general effect or with respect to a particular class of CCPs under Schedule 11. This power exists alongside the Bank's ability as CCP supervisor to make rules of general application pursuant to its statutory rule-making powers.

  4.5. As a matter of policy, the decision-making framework for the exercise of the Bank’s power of direction will be guided by two principles: (i) complying with international standards in relation to operational independence of the resolution authority, and sound governance (ii) maintaining close co-operation between the supervisory and resolution functions in relation to resolution activities, with CCPs receiving co-ordinated communications on resolution matters. More broadly, CCPs’ primary point of contact for going-concern supervisory matters remains their supervisory contact.

  5: Right of appeal

  5.1. A CCP has a right of appeal in relation to the use of the Bank’s power of direction.

  5.2. Unless otherwise decided by the Bank (in accordance with paragraph 3(2), Schedule 11), a Bank direction will not take effect until the period during which the direction may be referred to the Upper Tribunal has expired, or the reference and any appeal against the Tribunal’s determination has been finally disposed of. Paragraph 3(7) of Schedule 11 requires the Bank to inform the relevant person of the right to refer the matter to the Upper Tribunal and to indicate the procedure for such a reference.^{footnote [11]}