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April 10, 2014

How Does the Bank of England Supervise UK Financial Market Infrastructure Firms?

Key organisations within the UK provide components of the Financial Market Infrastructure, which the Bank of England must supervise.

Key organisations within the UK provide components of Financial Market Infrastructure, which the Bank of England must supervise to ensure the safety and soundness of the markets. The BoE PDF (attached below) sets out which those firms are, and how the Bank intends to assess them. Some of these firms are specific to the UK retail banking market, but all UK CCPs now fall under the remit of the Bank, including ICE, CME, LCH and EuroCCP. An extract from the introduction captures neatly the relationship between the CPSS/IOSCO PFMIs and EMIR:

As part of the Bank’s supervisory approach, supervised FMIs are assessed against international standards, as set out in the Principles for Financial Market Infrastructures (PFMIs) (see www.bis.org/publ/cpss106.pdf) published by CPSS-IOSCO in April 2012. The Bank expects FMIs to perform a self-assessment against these standards as an input into the Bank’s own assessment. Since both EMIR and the CSDR draw on the PFMIs for much of their content, there is overlap between these international standards and EU regulations for CCPs and securities settlement systems. For recognised payment systems, the Bank has adopted the PFMIs without amendment as the minimum principles on which systems are judged.

Key organisations subject to BoE supervision include:

  • CLS, who settle the large majority of FX business globally
  • CREST, operated by Euroclear, which settles UK gilts and equities (amongst other things)
  • LCH.Clearnet Ltd (futures, options, cash equities, OTC IRS, OTC FX NDFs, Fixed Income)
  • CME Clearing Europe (FX futures)
  • ICE Clear Europe (CDS, and the LIFFE business)
  • EuroCCP (cash equities)

The BoE approach to supervising these firms includes:

  • Cyber attack: "Part of the programme is vulnerability testing against key cyber threats. As part of this programme the Bank is developing new security testing standards, to which testing providers must be accredited before they can carry out vulnerability tests against financial sector participants including FMIs. This has been designed as a new product, working in conjunction with financial sector participants."
  • Governance: having independant participants at board level
  • Disclosure: "Over the past year, all supervised FMIs have worked towards meeting the requirements of the CPSS-IOSCO disclosure framework." (see www.bis.org/publ/cpss106.pdf)
  • Co-operative oversight, see chart below
  • Credit and liquidity risk for CCPs
  • Recovery and resolution Planning
  • Operational risk management

A chart in the report sets out the total IM requirements for OTC and ETD business across UK CCPs. What struck me is that the volume of business cleared continues to grow, yet the rise in IM seems relatively unchanged. Could this be the benefit of netting? Having more business in one CCP doesn't necessarily increase IM if the portfolio is sufficiently large, that trades offset each other for risk purposes. On a global scale the netting benefit of fewer CCPs is making it hard for new entrants to find business to clear, centralising pools of risk in relatively few CCPs.

 


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