The World Federation of Exchanges (WFE) has cautioned the Bank of England (BoE) that elements of its proposed reforms for UK CCPs risk diverging unnecessarily from international standards, creating operational and economic burdens without commensurate supervisory benefits.
Disproportionate margin modelling disclosure:
A key concern is the BoE’s proposal to require UK CCPs to disclose detailed information on their margin models to allow market participants to replicate them. This goes beyond international standards and would expose the proprietary methodologies and algorithms that CCPs have developed to maintain robust risk management practices.
Such disclosure requirements would weaken the position of UK CCPs, disincentivize innovation in margin modelling, and reduce the UK’s attractiveness as a global clearing hub. We urge the Bank to adopt a more proportionate, internationally-consistent approach, such as high-level disclosures that meet transparency objectives without eroding IP protections.
Skin-in-the-game:
In addition, the WFE is concerned about the BoE’s proposal to mandate CCPs to hold an additional tranche of prefunded “second skin-in-the-game” (SSITG) resources – set at 25% of risk-weighted capital – despite no clear evidence that such a requirement is necessary for financial stability.
This UK-only uplift would tie up capital and liquidity that could otherwise support productive economic activity. Linking SSITG to the size of the default fund would also misalign incentives by effectively making CCPs underwrite the risks brought by clearing members and end users, while operationally, the proposed one-month replenishment requirement is impractical during periods of stress. The WFE urges a more risk-sensitive, internationally aligned, evidence-based approach to resource calibration.
Nandini Sukumar, CEO of the World Federation of Exchanges, said in a statement: “Several elements of the Bank’s proposals fail to deliver intended improvements in financial stability. We encourage the Bank to work closely with industry to develop a framework that aligns with international standards and maintains appropriate incentives across the clearing ecosystem.”