On 30 June 2022, the Bank of England (BoE) published a Policy Statement and a Statement of Policy on its approach to ‘tiering’ non-UK central counterparties (incoming CCPs) based on the level of risk they could pose to UK financial stability. The BoE has also published a Policy Statement and a Statement of Policy on its approach to comparable compliance under Article 25a of the on-shored European Market Infrastructure Regulation (onshored EMIR).
Currently incoming CCPs can provide services in the UK under a temporary recognition regime. After this expires, under the on-shored EMIR, the BoE 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 implementation date for the final policy on tiering and comparable compliance is 1 December 2022.
Paragraph 3.3 of the BoE’s Statement of Policy on tiering provides a summary of the BoE’s approach to the tiering of incoming CCPs.
The BoE’s assessment will often involve several steps and comprises two stages, triage and advanced assessment. In summary, in Stage 1 incoming CCPs will be triaged against the following indicators:
- whether the incoming CCP held at least £10bn of UK clearing member initial margin;
- whether the incoming CCP held at least £1bn of UK clearing member default fund contributions; or
- if the incoming CCP has an interoperability arrangement in place with a UK CCP.
An incoming CCP that does not meet any of these criteria will usually be classified as a Tier 1 CCP under onshored EMIR. An incoming CCP that
meets one or more of these criteria will move forward to Stage 2. However, for incoming CCPs that meet one or both of the first two triage criteria, but not the interoperability criterion, the BoE will undertake a proportionality test where it will assess the proportion of total initial margin and default fund contributions attributable to UK clearing members.
Where both the initial margin and default fund contributions attributable to UK clearing members (or subsidiaries of UK headquartered clearing members) are below 20%, the BoE will determine if it is able to place reliance on the incoming CCP’s home authority’s regulation and supervision via a Level 1 informed reliance assessment. An incoming CCP that is below the proportionality test thresholds and where the BoE’s expectations for the Level 1 informed reliance assessment have been met, will be classified as Tier 1.
Where either or both the initial margin and default fund contributions attributable to UK clearing members (or subsidiaries of UK headquartered clearing members) is at or above 20%, or where the Level 1 informed reliance assessment expectations have not been met by the relevant home authority, the incoming CCP will move to Stage 2 of the tiering process.
An incoming CCP that meets the interoperability triage criterion will move forward to Stage 2 of the process and will not be subject to the proportionality test and the Level 1 informed reliance assessment.
The BoE has also published a Consultation Paper on its fees regime for incoming CCPs. The deadline for comments on the Consultation Paper is 15 September 2022.