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Central Counterparty Resolution Regime Code of Practice: HM Treasury Response to Resolution Liaison Panel comments

Updated 16 January 2024

Schedule 11 of the Financial Services and Markets Act Act 2023 (Schedule 11) requires the Treasury to issue a Code of Practice for the expanded resolution regime for central counterparties (CCPs). The Treasury must also consult the Resolution Liaison Panel (the Panel) on the content of the Code of Practice (the Code). The Panel was consulted on the content of the Code via written procedure on 23rd October 2023, for comment by 10th November 2023. The Treasury received six responses. This note summarises the Panel’s comments and the Treasury’s response.

1. Recovery vs resolution

The Code describes the stabilisation powers available to the Bank of England (the Bank) in the resolution of a CCP, as set out in Schedule 11. A number of Panel members highlighted that CCPs have existing recovery plans, and requested clarity on how these would interact with the Bank’s use of its stabilisation powers. The Treasury considers CCP recovery plans to be robust. The Bank may only use a stabilisation power if it is considered reasonably likely that action taken – outside resolution – would be insufficient to stop the CCP from failing or such action may have an adverse impact on the UK financial system.

That said, given the importance of clearing services to the UK and global economy, the Treasury considers it imperative that the Bank has the flexibility to use its stabilisation powers expediently when the resolution conditions are met. In response to feedback, the Treasury has made this clearer in the Code, emphasising that where a CCP has been placed into resolution, the Bank may direct the CCP to use rules in their recovery plans alongside, ahead of, or instead of use of the Bank’s other stabilisation powers, where that is appropriate.

2. Use of certain powers and impacts on clearing members

Some Panel members expressed concern that the loss allocation powers place disproportionate burdens on clearing members. As previously set out, including in the consultation response ^{[footnote 1]}, the Treasury is of the view that these loss allocation tools allow the Bank to manage the losses caused by the CCP’s failure in the most efficient way and that it is important for both CCPs and clearing members to contribute in resolution to ensure a CCP can be stabilised successfully. It is worth noting that the regime puts in place protections to avoid excessive burdens on industry. For example, paragraph 87 of Schedule 11 gives the Treasury the power to make regulations providing for compensation following a resolution, and requires that the Treasury have regard to the No Creditor Worse Off (NCWO) safeguard when exercising this power. The NCWO safeguard seeks to ensure that any relevant person does not receive less favourable treatment in resolution than they would have in a regular insolvency.  The Treasury would expect the Bank to consider this when deciding whether and how to exercise its stabilisation powers.

Some Panel members expressed concerns about the fairness and financial stability implications of the Bank’s cash call power. As the Treasury has set out previously, the Bank’s cash call power provides important means to absorb losses and help recapitalise a failing CCP, restoring it to viability and protecting financial stability. The Treasury has put in place arrangements to ensure that any use of the power would be proportionate. For example, as set out in the Code, the contribution rate under a cash call instrument may vary between clearing members, and the Bank can defer or waive obligations under a cash call instrument ^{[footnote 2]}, giving the Bank the necessary flexibility to exercise its power with careful consideration for the special resolution objective of protecting and enhancing the stability of the UK financial system.  

Several comments asked for detail on how the tear up power would be used in practice, and how the Bank would expect to determine a commercially reasonable payment when using this power. The Code notes that the tear up power is not designed to be a form of loss allocation, and so the Bank would likely use loss allocation mechanisms alongside tear up. Following the Panel’s feedback, the Code has been amended to reflect the fact that the Bank will seek to minimise the impact of tear up on surviving CCP members and wider financial markets. The Code has also been amended to refer to the requirement for the Bank to publish a Statement of Policy setting out how it would determine a commercially reasonable payment for the terminated contract.

The Treasury understands Panel members’ concerns about the impact of the stabilisation powers on set off and netting arrangements. Secondary legislation has been put in place to protect these arrangements in the case of partial property transfers and write down instruments ^{[footnote 3]}.  Further, the special resolution objectives under Schedule 11 include maintaining the continuity of clearing services and protecting and enhancing UK financial system stability. Both set off and netting arrangements are central to these objectives. The Code has therefore been adjusted to reflect the fact that the Bank will seek to minimise operational disruption to clearing services when exercising the stabilisation powers.

Panel members also requested clarity on the order in which different stabilisation options would be used. Given the unpredictability of a situation in which resolution would be necessary, the Treasury thinks it prudent to allow the Bank flexibility in how and in what order it would deploy its powers. As a result, this detail is not set out explicitly in the Code. For the same reason, the Bank is highly unlikely to consult before making stabilisation instruments, but will ensure they are effectively communicated, both as specified in Schedule 11 and using the CCP’s communication infrastructure.

3. Practical steps to give effect to resolution

Panel members also asked a series of questions relating to how the regime would be operationalised and the practical steps that would be taken to give effect to a resolution in practice. One comment focussed on how the rulebook, recognitions and authorisations that a CCP requires would apply to a bridge CCP. Further detail has been added to the Code regarding how the Bank will make appropriate arrangements in creating a bridge CCP. This includes that the Bank may consider basing the rules and procedures of the bridge CCP on those of the CCP in resolution, if appropriate.

It is appropriate to note here that the Bank will publish a number of additional documents that give further detail on how it would enact a resolution. For example, Schedule 11 requires the Bank to publish Statements of Policy on areas such as on how commercially reasonable payments will be calculated in relation to its tear up powers (as mentioned above), and its power to remove impediments to resolution. Further, the Bank envisages publishing a ‘Bank of England Approach to CCP Resolution’ in due course, which will more fully set out the operational framework of the regime.

4. Cooperation with and effects on third countries

Several Panel members requested further detail on cooperation with, and effects on, third countries during a CCP resolution. Firstly, the Code sets out that the Bank must have regard to the potential effect of resolution action on the financial stability of third countries where other members of a group of which the CCP is a member are operating. Secondly, the Bank runs a crisis management group for each of the UK CCPs that have been designated as systemically important outside the UK, in accordance with Financial Stability Board expectations. These operational considerations are outside the scope of the Code, and, where appropriate, will be set out in more detail in the Bank’s Approach to CCP Resolution.

5. General drafting suggestions

Some of the Panel members made more general drafting and clarification suggestions, which the Treasury has incorporated where appropriate.

1. The consultation and response can be found here: Expanded Resolution Regime for Central Counterparties (CCP): consultation - GOV.UK (www.gov.uk) ↩

2. The Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Deferment of Provisions in Resolution Instruments) Regulations 2023 (legislation.gov.uk) ↩

3. The Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Partial Property Transfers and Safeguarding of Protected Arrangements) Regulations 2023 (legislation.gov.uk) ↩