In a recent speech, Sasha Mills, executive director for Financial Market Infrastructure (FMI) at the Bank of England (BoE), discussed the importance of the Financial Services and Markets Act (FSMA) 2023 and how the BoE will adapt to the new regulatory architecture to support the UK’s clearing industry.
The changes to FSMA 2023 include an enhanced CCP resolution regime and the new regime provides the BoE, as Resolution Authority, with a broader suite of tools to ensure any UK CCP can be resolved quickly and effectively.
The new domestic resolution regime will only apply to UK CCPs, however, some of the tools could have an effect far outside the UK’s borders. Prior to using any of the resolution tools on a CCP that is part of a group (which currently includes all three UK CCPs), the BoE will have to consider the effect of using any of those tools on the financial stability of other jurisdictions, especially countries where other members of that CCP’s group operates.
The regime will also include a robust No Creditor Worse Off (NCWO) safeguard. Any creditor of a CCP would be eligible for compensation to the extent that it is less favorably treated in a resolution than it would have been if the CCP was taken into insolvency after using its recovery actions. This will, importantly, apply equally to all the CCP’s creditors, irrespective of their location.
Among the changes, the legislation requires that in any exercise of the rulemaking power, the BoE must consider the effects of those rules on the financial stability of any country where a central clearing counterparty (CCP) or central securities depository (CSD) provides services. The interconnectedness of global markets means that any shocks in one part of the world can quickly reverberate and cause stress at home, and the legislation codifies this responsibility in law.
In terms of accountability, one of the requirements will be to conduct a thorough Cost Benefit Analysis (CBA) on the proposed new rules. Some of these CBAs will be subject to scrutiny by a new, independent CBA panel which will cover the Prudential Regulation Authority (PRA) and BoE in its capacity as supervisor of CCPs and CSDs.
“This is important in part as we know that the costs and benefits of regulatory measures can be unevenly distributed, and these changes will help to ensure that our CBAs are as robust as possible. The panel will also provide recommendations for how regulators can improve their methodology and overall approach to CBA,” she said.
In addition, the BoE will receive a new secondary objective to, where possible, facilitate innovation within FMI services, as the central bank advances its primary financial stability objective.
In interpreting this objective, the BoE remains committed to maintaining an outcomes-based regulatory model, with these outcomes being rooted in a primary statutory objective to protect and enhance UK financial stability.
“We do not see this secondary objective as a deviation or a distraction from that primary objective. Rather, we see it as recognition that in an ever-changing world, innovation can bring benefits to the efficiency, functionality and resilience of the financial system,” said Mills.