BoE acquires powers to restrict CCP discretionary payments
19 February 2024 UK
Image: AdobeStock//William
The Bank of England has acquired additional powers to restrict discretionary payments from central counterparties to employees and shareholders, according to provisions that came into effect on 16 February.
These powers are extended under Schedule 11 of the Financial Services and Markets Act of 2023, which sets out the design of a special resolution regime for central counterparties (CCPs) and provides additional powers to the bank in severe stress conditions in line with its objective to protect financial stability.
The statement of policy (SoP) specifies that this is a power that the BoE should exercise only in severe circumstances and is limited to a maximum duration of five years.
In final revisions to the SoP, on the basis of industry consultation, the BoE will take into account the impact on a CCP鈥檚 ability to hire and retain staff as part of steps to ensure continuity of critical services.
The bank indicates that it received just two responses to its call for feedback, one from a CCP and a joint response submitted by two trade associations 鈥� which it does not name, but SFT understands to be the International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA) 鈥� which was filed on 23 November 2023.
The Bank has concluded on the basis of its consultation and research that the proposed approach will not place an undue burden on firms and is in line with its objective to promote financial stability.
The BoE indicates that both responses were broadly supportive of its proposals, but respondents asked for further information regarding how the Bank intends to use these powers. In raising questions about the proportionality of the bank鈥檚 approach, one respondent urged the bank to exercise discretion in applying these facilities.
One respondent questioned whether restrictions on a CCP鈥檚 ability to make discretionary payments to shareholders and employees 鈥� for example through equity remuneration 鈥� would have a significant impact on the CCP鈥檚 financial resilience or liquid resources at its disposal.
In responding to these queries, the Bank of England indicated that, in exercising these powers, it would take into account the impact of restricting certain types of discretionary payment on the ability of the CCP to maintain critical clearing services and on the clearing house鈥檚 wider operational functioning. This would include the impact of these measures on hiring policy and staff retention.
The FIA and ISDA indicate in their response that the new power is an important element within the BoE鈥檚 supervisory toolkit which can serve to support a CCP鈥檚 financial resilience in times of stress.
鈥淎s such, it reduces the likelihood that a UK CCP would reach a point where it is falling or likely to fail, thereby safeguarding financial stability in the UK, but also in third countries where clearing members are established,鈥� say the associations.
鈥淚t also provides further assurance that the continuity of critical clearing services can be maintained in times of stress.鈥�
While the FIA and ISDA specify that their response 鈥渃overs the positions of their members on the buy-side and sell-side鈥�, they suggest that their paper 鈥渄oes not reflect the views of many CCPs鈥� and that 鈥渟ome CCPs are in disagreement鈥� (ISDA and FIA, p.1).
In developing their argument, the associations welcome the BoE鈥檚 commitment to ensuring public confidence in the UK financial system, including its CCPs, as part of the public interest in UK financial stability. They deem this to be particularly important, recognising the cross-border nature of the clearing activities offered by UK CCPs 鈥渨hich are relied upon by market participants globally鈥�.
In cases where the BoE identifies a shock to a CCP that could result in material financial losses 鈥� such that its ability to provide vital clearing services could be threatened 鈥� the associations agree that 鈥渟uch a scenario would justify the use by the BoE of the power to give direction to restrict or prohibit discretionary payments鈥�.
However, they emphasise that their preferred approach to ensure that a CCP remains viable is to require ex-ante pre-funded resources from the CCP 鈥� requiring that it has adequate 鈥渟kin in the game鈥�. With this in mind, 鈥渨e look forward to engaging with the BoE in its planned work with regards to the calibration of a second tranche of skin-in-the-game鈥�, say the two associations.
These powers are extended under Schedule 11 of the Financial Services and Markets Act of 2023, which sets out the design of a special resolution regime for central counterparties (CCPs) and provides additional powers to the bank in severe stress conditions in line with its objective to protect financial stability.
The statement of policy (SoP) specifies that this is a power that the BoE should exercise only in severe circumstances and is limited to a maximum duration of five years.
In final revisions to the SoP, on the basis of industry consultation, the BoE will take into account the impact on a CCP鈥檚 ability to hire and retain staff as part of steps to ensure continuity of critical services.
The bank indicates that it received just two responses to its call for feedback, one from a CCP and a joint response submitted by two trade associations 鈥� which it does not name, but SFT understands to be the International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA) 鈥� which was filed on 23 November 2023.
The Bank has concluded on the basis of its consultation and research that the proposed approach will not place an undue burden on firms and is in line with its objective to promote financial stability.
The BoE indicates that both responses were broadly supportive of its proposals, but respondents asked for further information regarding how the Bank intends to use these powers. In raising questions about the proportionality of the bank鈥檚 approach, one respondent urged the bank to exercise discretion in applying these facilities.
One respondent questioned whether restrictions on a CCP鈥檚 ability to make discretionary payments to shareholders and employees 鈥� for example through equity remuneration 鈥� would have a significant impact on the CCP鈥檚 financial resilience or liquid resources at its disposal.
In responding to these queries, the Bank of England indicated that, in exercising these powers, it would take into account the impact of restricting certain types of discretionary payment on the ability of the CCP to maintain critical clearing services and on the clearing house鈥檚 wider operational functioning. This would include the impact of these measures on hiring policy and staff retention.
The FIA and ISDA indicate in their response that the new power is an important element within the BoE鈥檚 supervisory toolkit which can serve to support a CCP鈥檚 financial resilience in times of stress.
鈥淎s such, it reduces the likelihood that a UK CCP would reach a point where it is falling or likely to fail, thereby safeguarding financial stability in the UK, but also in third countries where clearing members are established,鈥� say the associations.
鈥淚t also provides further assurance that the continuity of critical clearing services can be maintained in times of stress.鈥�
While the FIA and ISDA specify that their response 鈥渃overs the positions of their members on the buy-side and sell-side鈥�, they suggest that their paper 鈥渄oes not reflect the views of many CCPs鈥� and that 鈥渟ome CCPs are in disagreement鈥� (ISDA and FIA, p.1).
In developing their argument, the associations welcome the BoE鈥檚 commitment to ensuring public confidence in the UK financial system, including its CCPs, as part of the public interest in UK financial stability. They deem this to be particularly important, recognising the cross-border nature of the clearing activities offered by UK CCPs 鈥渨hich are relied upon by market participants globally鈥�.
In cases where the BoE identifies a shock to a CCP that could result in material financial losses 鈥� such that its ability to provide vital clearing services could be threatened 鈥� the associations agree that 鈥渟uch a scenario would justify the use by the BoE of the power to give direction to restrict or prohibit discretionary payments鈥�.
However, they emphasise that their preferred approach to ensure that a CCP remains viable is to require ex-ante pre-funded resources from the CCP 鈥� requiring that it has adequate 鈥渟kin in the game鈥�. With this in mind, 鈥渨e look forward to engaging with the BoE in its planned work with regards to the calibration of a second tranche of skin-in-the-game鈥�, say the two associations.
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