Consultation Paper: The Bank of England’s approach to tiering incoming central counterparties under EMIR Article 25

Following the UK’s withdrawal from the European Union (‘EU’), the Bank of England (‘the Bank’) has responsibility for recognising and supervising non-UK central counterparties (‘incoming CCPs’) intending to provide clearing services to clearing members or trading venues established in the UK.

The Bank has issued a Consultation Paper and draft Statement of Policy setting out its proposed approach to ‘tiering’ incoming CCPs. Tiering is the classification of individual incoming CCPs according to the level of systemic risk they could pose to UK financial stability. CCPs that are not considered systemically important or likely to become systemically important to the UK will be designated ‘Tier 1’ CCPs. If incoming CCPs are considered to pose risks to UK financial stability, the Bank can potentially designate them as ‘Tier 2’ CCPs, which results in those CCPs becoming subject to direct UK supervision and regulation under the on-shored European Market Infrastructure Regulation (EMIR).

Under the Bank’s tiering proposals, incoming CCPs will be assessed to establish if they might pose systemic risks to the UK. They will initially be triaged against the following indicators: i) whether the incoming CCP held at least £10bn of UK clearing member initial margin; ii) whether the incoming CCP held at least £1bn of UK clearing member default fund contributions; or iii) if the incoming CCP has an interoperability arrangement in place with a UK CCP. The Bank will undertake a more detailed assessment of systemic importance for CCPs meeting one or more of these indicators. Incoming CCPs that are assessed as not systemically important under this triage assessment will be classified as Tier 1 CCPs and will not progress to the next stage of the tiering assessment.

For those that do progress, the Bank will undertake an ‘informed reliance assessment’ to consider to what extent it is able to rely on home regulation and supervision of the incoming CCP, taking into account the cooperation and information sharing arrangements in place with the incoming CCP’s home authority. Where a jurisdiction is committed to meet our expectations regarding cooperation, reliance and, information sharing with respect to a large CCP, the Bank will deem that CCP Tier 1 remaining under home authority supervision, provided that it can see on an ongoing basis that its home regulators are delivering the outcomes we need to protect UK financial stability.  Those that do not meet these expectations would be classified as Tier 2. The Bank will have higher expectations of cooperation from home authorities of CCPs where the UK proportion of total initial margin or default fund contributions is greater than 20%.

CCPs that do not meet the expectations of the informed reliance assessment and are assessed as systemically important will therefore be considered as Tier 2. A Tier 2 CCP is required to meet specific UK standards under on-shored EMIR and can be subject to direct supervision by the Bank. There may however be specific regulatory provisions for which these CCPs can be granted “comparable compliance”, and the UK can defer its supervision in these areas to the home authorities, as outlined in a separate Consultation Paper.

The Bank proposes that the implementation date for the final policy will be Friday 1 July 2022. This consultation closes on Friday 25 February 2022.

The full documentation is available here.

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