The Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Calculation of Maximum Amounts for Cash Calls and Use of Specified Funds) Regulations 2023

The new Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Calculation of Maximum Amounts for Cash Calls and Use of Specified Funds) Regulations 2023 were published on legislation.gov.uk, the online platform of the UK government for publicizing legal documents.
The regulations relate to resolution instruments that the Bank of England (BoE) may apply in situations where a central counterparty is failing or likely to fail pursuant to the resolution regime specified in Schedule 11 of the Financial Services and Markets Act 2023. The Bank’s resolution instruments include, for instance, the right to terminate CCP contracts with clearing members (tear-up instrument), the right to cancel variation margin payments to clearing members (variation instrument), or the right to write-down liabilities of a CCP (write-down instrument), to name the most significant ones. In these new regulations now, the UK government specifies provisions for the application of the cash-call instrument which allows the BoE to collect money from clearing members in case of a CCP failure, even if the clearing member was not responsible for the failure.
Specifically, the new regulations set limits on how much money the BoE can collect from clearing members depending upon the cause of the CCPs financial troubles. They also outline when the Bank can use funds held by the CCP on behalf of a clearing member (e.g. margins) to cover a member’s obligations under a cash-call.
In detail, if the financial troubles of a CCP are caused by the default of one or more of its clearing members and the CCP maintains multiple prefunded default funds, the maximum payment a clearing member might need to make is twice its contribution to EACH applicable prefunded default fund. This calculation is done individually for each relevant prefunded default fund and for each clearing member.
If the troubles are NOT caused by the default of a clearing member, a clearing member can be obliged to pay up to three times its contributions to all prefunded default funds. Additionally, the BoE may collect such funds from clearing members irrespective the funds they may have had to pay (already) due to losses occurred by the CCP from the default of a clearing member. The difference in caps between default and non-default loss scenarios stems from the absence of a „variation instrument“ (as described above) in non-default loss scenarios of a CCP. Due to this absence, a higher cash call cap is necessary to grant the Bank the needed flexibility to effectively manage the resolution of a CCP.
Finally, the new regulations stipulate that the BoE may direct a CCP to utilize specific funds held on behalf of a clearing member if that member fails to meet its obligations under a cash-call instrument. These funds include initial margin payments, default fund contributions, and any excess collateral.