The Bank of England has acquired additional powers to restrict discretionary payments from central counterparties to employees and shareholders, according to provisions that came into effect on 16 February.
These powers are extended under Schedule 11 of the Financial Services and Markets Act of 2023, which sets out the design of a special resolution regime for central counterparties (CCPs) and provides additional powers to the bank in severe stress conditions in line with its objective to protect financial stability.
The statement of policy (SoP) specifies that this is a power that the BoE should exercise only in severe circumstances and is limited to a maximum duration of five years.
In final revisions to the SoP, on the basis of industry consultation, the BoE will take into account the impact on a CCP’s ability to hire and retain staff as part of steps to ensure continuity of critical services.
The bank indicates that it received just two responses to its call for feedback, one from a CCP and a joint response submitted by two trade associations — which it does not name, but SFT understands to be the International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA) — which was filed on 23 November 2023.
The Bank has concluded on the basis of its consultation and research that the proposed approach will not place an undue burden on firms and is in line with its objective to promote financial stability.
The BoE indicates that both responses were broadly supportive of its proposals, but respondents asked for further information regarding how the Bank intends to use these powers. In raising questions about the proportionality of the bank’s approach, one respondent urged the bank to exercise discretion in applying these facilities.
One respondent questioned whether restrictions on a CCP’s ability to make discretionary payments to shareholders and employees — for example through equity remuneration — would have a significant impact on the CCP’s financial resilience or liquid resources at its disposal.
In responding to these queries, the Bank of England indicated that, in exercising these powers, it would take into account the impact of restricting certain types of discretionary payment on the ability of the CCP to maintain critical clearing services and on the clearing house’s wider operational functioning. This would include the impact of these measures on hiring policy and staff retention.
The FIA and ISDA indicate in their response that the new power is an important element within the BoE’s supervisory toolkit which can serve to support a CCP’s financial resilience in times of stress.
“As such, it reduces the likelihood that a UK CCP would reach a point where it is falling or likely to fail, thereby safeguarding financial stability in the UK, but also in third countries where clearing members are established,” say the Associations.
“It also provides further assurance that the continuity of critical clearing services can be maintained in times of stress.”
While the FIA and ISDA specify that their response “covers the positions of their members on the buy-side and sell-side”, they suggest that their paper “does not reflect the views of many CCPs” and that “some CCPs are in disagreement” (ISDA and FIA, p.1).
In developing their argument, the associations welcome the BoE’s commitment to ensuring public confidence in the UK financial system, including its CCPs, as part of the public interest in UK financial stability. They deem this to be particularly important, recognising the cross-border nature of the clearing activities offered by UK CCPs “which are relied upon by market participants globally”.
In cases where the BoE identifies a shock to a CCP that could result in material financial losses — such that its ability to provide vital clearing services could be threatened — the associations agree that “such a scenario would justify the use by the BoE of the power to give direction to restrict or prohibit discretionary payments”.
However, they emphasise that their preferred approach to ensure that a CCP remains viable is to require ex-ante pre-funded resources from the CCP — requiring that it has adequate “skin in the game”. With this in mind, “we look forward to engaging with the BoE in its planned work with regards to the calibration of a second tranche of skin-in-the-game”, say the two associations.
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