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On 19 December 2022 the Bank of England
(“BoE“) published its annual report on Financial
Market Infrastructures’ (“FMIs“)
supervision which sketches the BoE’s work undertaken during
2021/22 and sets out its supervisory approach for 2022/23
There are two main themes cutting through the Report which are
relevant to firms:
- Lessons Learnt for firms from the 2021/22
reporting period (where available); and
- New Rules: BoE prepares firms for upcoming
regulatory developments, also in light of the new general
rulemaking powers under the Financial Services and Markets Bill
(“FSMB”) currently before the UK
Parliament with respect to central securities depositories
(“CSDs“) and central counterparties
BoE focuses on four key areas: operational resilience, CCP
resilience and recovery, innovation in payments and recognition and
supervision of cross-border CCPs and CSDs.
Overall, the BoE is maintaining the same focus in relation to
FMI supervision as during the latest reporting period. The
BoE’s emphasis is being placed on enhancing operational
resilience whilst ensuring that this does not impede innovation.
The main game changer for the upcoming year is expected to be the
enactment of the FSMB that will equip the BoE with additional
The rest of this blog post provides more details on the content
of the Report.
- 2022 was a year that put FMIs under significant market shocks
due to the pandemic and the war in Ukraine. Nevertheless, FMIs have
proven resilient to these extraordinary market conditions.
- The suspension of nickel trading for a week by the London Metal
Exchange (“LME“) due to the extreme
market volatility and the build up of large derivative exposures
(many of which to be cleared by LME Clear) forced the BoE to look
into LME Clear’s governance and risk management framework to
extract any lessons learnt.
- The settlement system outage that Euroclear UK and
International (“EUI“) suffered (the
second since 2020) forced BoE to take enforcement action and to use
its supervisory tools to maintain the resilience in EUI.
Specifically, the BoE made use of its power under Section 166 of
the Financial Services and Markets Act 2000 to require EUI to
appoint a skilled person responsible for assessing whether the
relevant lessons learnt from the first outage back in 2020 had been
appropriately implemented and whether any additional steps to
improve IT resilience need to be taken.
- The BoE together with the Financial Conduct Authority
(“FCA“) and Prudential Regulation
Authority published a joint Discussion Paper in July 2022 to present
the potential measures by way of which supervisory authorities
could use the proposed new powers under the FSMB in respect of
improving the resilience of services outsourced to critical third
parties (“CTPs“) by firms and FMIs.
These measures are build on three pillars according to the FSMB:
- Identifying CTPs and recommending them to HMT for formal
- Setting minimum resilience standards for designated CTPs in
respect of material services provided to firms and FMIs; and
- Tools for testing the resilience of material services that CTPs
provide to firms and FMIs.
- Identifying CTPs and recommending them to HMT for formal
The BoE will continue to work to incorporate the new rules into
its supervisory framework.
- The FSMB will introduce a high-level Senior Managers and
Certification Regime framework for CCPs and CSDs. The BoE is
expected to develop a policy in that respect in conjunction with
- The BoE will continue to undertake thematic and firm-specific
deep dive reviews across the FMIs.
- The BoE will ensure that FMIs comply with their obligation to
implement the BoE’s latest policy requirement for operational resilience
CCP resilience and recovery
- In October 2022, the BoE published the results of its first public CCP
supervisory stress test (a) exploring the credit and liquidity
resilience of the three UK CCPs as well as (b) performing a reverse
stress test to understand what would be required to deplete
CCPs’ financial resources and (c) analysing the impact of the
stress test scenario on CCP’s clearing members and their
clients. Results varied per CCP though none of the UK CCPs
experienced full depletion of prefunded financial resources or
negative liquidity balance.
- Rules on CCP margin will primarily derive from the work of the
joint BCBS-CPMI-IOSCO group which is co-chaired by the BoE.
Following the publication of the final report on margining
practices in September 2022, further international work is expected
on liquidity preparedness and data gaps in regulatory
- As set out in the BoE’s policy statement in relation to the
discontinuation of the USD Libor benchmark at the end of Q2 2023,
USD Libor referencing contracts will be removed from the clearing
obligation on 24 April 2023.
- The BoE intends to publish a framework document for CCP
supervisory stress testing, which will set out the BoE’s
framework for CCP supervisory stress testing and guide the design
of each of the BoE’s annual stress testing exercises. This new
framework will be developed on the basis of the BoE’s Discussion Paper on Supervisory Stress Testing
of Central Counterparties together with the lessons learned from
the first CCP stress testing exercise.
- The BoE will also start preparing its second CCP stress
- New CCP resolution and pre-resolution rules will be introduced
under the FSMB, which will largely mimic banking resolution rules
in line with international standards.
Innovation in payments
- Significant work has been done by CPMI-IOSCO in relation to the
design of stablecoin arrangements confirming that the Principles for FMIs apply
to systemically important stablecoin arrangements that transfer
stablecoins. In addition, this guidance by CPMI-IOSCO addresses
issues of governance, risk management, settlement finality and
money settlements, as well as considerations related to the
classification of a stablecoin arrangement as systemically
important. The rules set out in the FSMB are consistent with the
- The BoE’s regulatory framework for systemic stablecoins
will follow the proposed FSB’s “Global
Stablecoin” (“GSC“) arrangements
which in turn are expected to be finalised by July 2023. The
revised framework requires GSC arrangements to provide a robust
legal claim, guarantee timely redemption at par into fiat and
maintain effective stabilisation mechanisms, as well as to be
subject to appropriate prudential requirements.
- The new stablecoin regime in the UK will be combined with a
Special Administrative Regime for stablecoins which will be a
bespoke insolvency framework for systemic payment and settlement
- New rules are likely to be introduced in respect of wholesale
cash distribution network in the UK. In line with the BoE consultation on this matter, any firm
recognised as systemic by HMT would be brought into the scope of
the BoE’ prudential supervision. The above notwithstanding,
currently it appears that no firm in the wholesale cash sector
would meet the criteria for systemic recognition.
- The BoE is working together with HMT and the FCA to develop an
FMI Sandbox which should be ready for launch by the end of 2023.
Participating firms will have the possibility to test and adopt new
technologies that are currently not supported by the existing
Recognition and supervision of cross-border CCPs and CSDs
- The BoE is expected to start implementing its recently
introduced policy regime for incoming FMIs. Therefore,
the BoE is expected to proceed with the recognition of incoming
CCPs and CSDs where the requirements for recognition are met
prioritising for firms that may pose a risk to UK financial
stability. These requirements entail a decision by HMT that the
relevant jurisdiction’s regulatory framework is equivalent and
that appropriate and proportionate supervisory cooperation and
information sharing is being agreed with the incoming FMI’s
home authority. In this context, the BoE is also aiming to enter
into the necessary Memoranda of Understanding with overseas
authorities to support recognition.
- Alongside the recognition process, incoming FMIs may obtain
protection from certain insolvency challenges under the Settlement
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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