On 24 February 2021, HM Treasury issued a consultation document setting out the Government’s proposals to expand the resolution regime for central counterparties (CCPs).

Amendments to the Banking Act 2009 extended the UK’s resolution regime for banks to include CCPs (although the regime takes a different approach to a CCP resolution in comparison to a bank resolution, reflecting a CCP’s specific characteristics). The proposed expanded CCP resolution regime would give the Bank of England (BoE) additional powers to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds. The proposed new regime would add to the existing CCP resolution powers, which will be retained.

The proposed new powers and tools include:

  • Removal of material impediments to resolvability. This power would enable the BoE to require a CCP to make ex ante changes to its arrangements to remove potential barriers to resolvability identified by the BoE.
  • Conditions and timing for entry into resolution and engagement between authorities. This power would enable the BoE to place a CCP into resolution (by exercising a resolution power) before the CCP’s own recovery measures have been exhausted, on the condition that continued recovery actions by the CCP would likely ‘compromise financial stability’.
  • Lockdown or deferral period on the payment of dividends, buybacks or variable remuneration. This power would enable the BoE to temporarily restrict or prohibit any remuneration of equity in severe circumstances, including if there is a rapid deterioration in the financial situation of the CCP, and it was therefore at risk of failing. It would be available as an early intervention measure, but also after the CCP has entered resolution.
  • Power to suspend termination rights. This power would give the BoE the ability to stay temporarily any right to early termination of participation by a clearing member that arises as a result of a CCP being placed in resolution.
  • Power to take control of the CCP. This power would enable the BoE to take control of a CCP without having to rely on its existing property or share transfer powers.
  • Power to remove and replace directors and senior executives and to appoint temporary managers. This proposal would provide the BoE with the power to direct a CCP to remove or replace directors and senior executives and appoint temporary managers in severe circumstances, as the PRA and FCA are already able to do for other types of financial services firms.
  • Power to return the CCP to a matched book. The BoE would have the flexibility to perform a full or partial tear up of contracts, depending on the scenario and the potential wider impacts on financial stability. In order to provide clearing members and end users with greater certainty of how these powers would work in practice, the BoE will set out how it intends to use these powers in the event of a CCP failure.
  • No creditor worse off safeguard. This safeguard would replicate an existing safeguard in the bank resolution regime.
  • Deviation from a CCP’s rules and arrangements. The proposal would allow the BoE to deviate from a CCP’s rules and arrangements.
  • Second tranche of skin in the game. CCPs are already required to hold a ring-fenced tranche of their own capital (“skin in the game” or “SITG”) as part of their recovery measures. This proposal introduces a second tranche of CCP SITG sitting after the prefunded default fund, requiring CCPs to hold a greater amount of capital for loss absorption.
  • Power to perform variation margin gains haircutting. In resolution, this would give the BoE the ability to reduce or cancel the variation margin payments that a CCP would otherwise have been required to make to clearing members whose house and client positions have gained value.
  • Powers to generate additional loss absorbing capacity through write down of unsecured liabilities (in non-default scenarios) and collecting cash contributions from clearing members (cash call power, in both default loss and non-default loss scenarios).
  • Power to delay enforcement of a clearing member’s obligation in resolution. This power enables the BoE to delay enforcement of a clearing member’s obligations in resolution should such enforcement during the resolution of the CCP present a risk to financial stability.
  • This power would enable the BoE to use statutory loss allocation tools to recapitalise the CCP and replenish its prefunded resources, not just absorb losses.

The deadline for comments on the consultation is 28 May 2021.

The Government will consider how best to legislate for the proposals set out in the consultation. It will legislate when parliamentary time allows.