Transparency data

Central Counterparty (CCP) Resolution Liaison Panel Minutes

Updated 16 January 2024

Meeting date: 28 June 2023, 16:00-17:30

Location: Virtual meeting (via MS Teams)

Attendees

• HM Treasury (the Treasury): George Barnes (Chair), Henry Grigg, Edward Henley, Daniel Finucane, Precious Oladipo

• Bank of England: Nishi Shant, Ben Mitchell, Dan Wright, Barry King

• Financial Conduct Authority (FCA): Jack Wheeler

• Prudential Regulation Authority (PRA): Jonathan Sepanski

• Intercontinental Exchange (ICE) Clear Europe: Laurence Walton

• LCH, LSEG: Joanne Napleton

• London Metal Exchange (LME): Chris Jones

• International Swaps and Derivatives Association: Ulrich Karl, Sarah Crowley

• Futures Industry Association: Doanh Le Ngoc

• City of London Law Society: Insolvency Law Committee: Peter Hughes

• Financial Markets Law Committee: Brian Gray

• R3 General Technical Committee: Mike Pink, Ben Luxford

• Insolvency Service: Paul Bannister

• Insolvency Lawyers Association’s Technical Committee: Lucy Aconley

1. Introduction – agenda item 1

The Treasury explained that the Panel was being brought together on an extraordinary basis ahead of Royal Assent of the Financial Services and Markets Act 2023^{[footnote 1]} to allow for industry views to be shared on plans to implement the expanded resolution regime for central counterparties (CCPs) at an earlier stage. It was noted panel members were able to submit written feedback subsequent to the meeting (which has been captured in these minutes where relevant).

2. Terms of reference – agenda item 2

The Treasury introduced the previously shared Terms of Reference for the CCP Resolution Liaison Panel, which received no objections or comments from panel members.

3. Update on timings for implementation – agenda item 3

The Treasury ran through timings for implementing the expanded CCP resolution regime. The Treasury explained the plan to commence certain regulation-making powers two months after Royal Assent of the Financial Services and Markets Act 2023, to enable the laying of certain regulations ahead of fully operationalising the regime. The Treasury continued by explaining that the Treasury’s aim, subject to the usual Government and Parliamentary processes, is to bring the four Statutory Instruments (SIs) being discussed under the next agenda item into force by the end of 2023, allowing the expanded regime to be fully operationalised at that point. The Treasury explained that HMT will then follow up with a second set of regulations covering compensation and valuation under the regime in 2024.

One panel member asked whether the instruments were negative or affirmative. The Treasury noted that two of the instruments would be subject to the negative procedure, whilst the other two would be subject to the affirmative procedure.

4. Discussion on policy paper - agenda item 4

Cash call

The Treasury introduced the first of the four SIs, which concerned the Bank’s power to impose a cash call on a CCP’s clearing members during a resolution under paragraph 32 of Schedule 11 of the Financial Services and Markets Act 2023. The Treasury explained that the SI would place caps on the cash call power and outlines the process where a clearing member fails to perform on its obligations under a statutory cash call. The Treasury also explained how the caps will operate in a default loss, a non-default loss, and in a mixed scenario (where there is a default and a non-default loss). The Treasury explained that this implements the policy that was consulted on in 2021, and that the Government recommitted to implementing in the Government response in 2022 and the explanatory notes to the Act.

One panel member asked for further background on how the cash call caps were originally decided upon and questioned the use of default fund contributions to determine cash call caps in a non-default loss scenario. Another panel member asked whether current international work being conducted by CPMI-IOSCO (Committee on Payments and Market Infrastructures – International Organisation of Securities Commissions) will influence the Government’s thinking on cash call caps and questioned whether linking cash call caps to default fund contributions in a non-default loss scenario could lead to potentially high compensation payments given the potential effect on wider markets, affecting public funds.

The Treasury noted these concerns and outlined that the different caps reflect the different nature of potential scenarios, and uncertainty over market impacts in a non-default loss scenario. The Bank of England explained that the methodology used to set the cash call caps was intended to be transparent and reflect the size of risk posed by the CCP’s failure, and the size of the CCP. The Bank of England also explained that current international work is predominantly considering CCP practices for dealing with losses, rather than clearing members.

Another Panel member questioned whether it will be the Bank of England that ensures the ‘No Creditor Worse Off’ (NCWO) safeguard is met. The Treasury outlined that it will be the Treasury laying the regulations that set out the NCWO safeguard, with a decision about whether compensation is due ultimately made by an independent valuer as provided for by the regulations. The Bank of England outlined that the NCWO safeguard would apply where third parties are exposed to loss in resolution that exceeds the loss they would have incurred under the counterfactual. The relevant CCP creditor could claim for the difference under the NCWO safeguard. In response to another question around whether the Bank of England will have regard to the NCWO safeguard when using the cash call power, the Bank of England noted that it would be mindful of the implications of the NCWO safeguard when determining which resolution tools to use and how to use them.

Subsequently to the panel discussion, a Panel member asked whether the Treasury had considered the impact of the cash call caps on capital requirements, and the incentives they may have on clearing members. They also asked whether any consideration has been given to using additional CCP resources to address non-default loss scenarios.

The Treasury confirmed that it does not envisage that the cash call will affect capital requirements. The Treasury also confirmed its position, that the overall package of CCP resolution powers introduced under Schedule 11 of the Financial Services and Markets Act 2023 ensures losses in a resolution are allocated fairly and proportionately between CCPs and its clearing members, whilst also ensuring the powers generate the loss absorbency necessary to stabilise a failing CCP effectively.

Deferment

The Treasury outlined the policy intent of an SI which would outline the process by which the Bank of England will be able to defer or waive obligations imposed on a clearing member under a resolution under paragraph 85 of Schedule 11 of the Financial Services and Markets Act 2023.

One Panel member asked how the NCWO safeguard would be applied to use of this power, and whether compensation would be available for all clearing members only after all deferred obligations have been met. The Treasury clarified that the intention is for the NCWO safeguard to apply wherever a loss is allocated under a resolution instrument, so would apply to deferred obligations to the extent they are enforced, and noted the Treasury would consider the interactions with the power further when developing the compensation SI.

Another Panel member asked whether any thought has been given to deferment disrupting netting or set off arrangements. The Bank of England clarified that this should not pose a significant issue, as the power to defer will apply primarily to loss-allocation tools (such as cash call, write-down and variation margin gains haircutting (VMGH)), and will not apply to obligations under cleared contracts. However, the Treasury and Bank of England committed to considering the point further in developing the final SI.

Safeguarding

The Treasury outlined the policy intent of an SI to mirror Banking Act 2009 precedent and safeguard certain protected arrangements from partial property transfers and write-downs performed under a resolution.

One Panel member enquired as to whether this SI will affect the order of priority in an insolvency. Another Panel member asked whether all of the protections provided will also apply to reverse transfers. Subsequently to the panel discussion, the Treasury confirmed that this SI would not change the order of priority in insolvency, and the safeguarding SI would apply all protections to reverse property transfers (in paragraphs 68, 70 and 72 of Schedule 11).

Consequential amendments

The Treasury outlined the various consequential amendments being made under this SI. One Panel member enquired as to whether this SI would make any changes to insolvency law, and the Treasury agreed to follow up on this point. Upon review, the Treasury confirmed that the SI would not make any changes to insolvency law.

1. Since the meeting of the panel, the Financial Services and Markets Bill has received Royal Assent as is henceforth referred to as the Financial Services and Markets Act 2023 ↩