Ensuring continuity of critical clearing services: the Bank of England’s approach to discretionary payments by central counterparties

The Bank of England (BoE) has launched a new consultation on a proposed new Statement of Policy (SoP) – „Ensuring continuity of critical clearing services: the Bank of England’s approach to discretionary payments by central counterparties“ which would outline the Bank’s approach to give directions to recognized UK central counterparties (CCPs) that restrict or prohibit „discretionary payments“ (dividend payments, flexible remuneration, equity share remunerations) to specific shareholders or employees in certain circumstances. The policy would be based on the new powers granted to the BoE by the Financial Services and Markets Act 2023 (FSMA 2023) with the aim to ensure the continuity of essential clearing services during periods of financial stress and uncertainty, supporting the Bank’s objective of protecting and enhancing UK financial stability.
Specifically, the new SoP would contain four key sections, including the following:
(1) Introduction: This section introduces the policy and its relevance to recognized UK CCPs, emphasizing the importance of maintaining critical clearing services in times of crisis. It also sets out the key objective of the BoE which is to protect the UK financial market and financial stability overall. It finally highlights the need for the SoP stating that the Bank of England would only make use of the power in exceptional circumstances.
(2) Regulatory background and conditions for applying the new powers This section outlines the role of CCPs in financial markets, their significance in safeguarding financial stability, and their recovery and resolution mechanisms. It also explains the power granted to the Bank to restrict or prohibit discretionary payments in severe circumstances pursuant to Schedule 11 of the FSMA 2023. Thereafter, the Bank may only use the power if certain conditions are met such as
– there are no ongoing stabilization powers applied to the CCP;
– the use of the powers would be in line with public interest; or
– there is a severe threat to the maintenance of substantial clearing services.
The FSMA 2023 also requires the bank to review the directions once every quarter to ensure that the above noted conditions are still met. If not, the BoE needs to modify the restrictions or revoke them altogether. The Bank is also required to consider all existing laws and regulations when exercising these powers.
(3) Approach to giving directions: This section outlines in detail the above noted conditions that must be fulfilled for using the power to restrict or prohibit discretionary payments. It also includes a non-exhaustive list of situations that may trigger the issuance of directions such as
– the existence of essential risks in the UK financial market that could possible skip to a CCP;
– major (anticipated) financial losses of a CCP; or
– the occurrence of „unanticipated“ major business risks, e.g. as in the case of material cyberattacks.
(4) Process of giving directions: The final section explains the process of issuing directions. Thereafter, the Bank will issue formal written directions to an affected CCP specifying the reason, the duration, and the scope of the restrictions. The directions can be varied or revoked based on changing conditions. However, in such case the BoE is obliged to notify the CCP.