The European Association of CCP Clearing Houses (EACH) has responded to the Bank of England’s consultation on ensuring the resilience of CCPs, as well as the consultation on the Bank of England’s approach to rule permissions and waivers.
EACH Members particularly welcome the following:
- Investment policy requirements – EACH supports the Bank’s proposals on this matter, and invite the Bank to take the opportunity to consider possibility for CCPs to invest in highly liquid financial instruments with minimal market and credit risk such as EU bonds, covered bonds, MMFs, corporate bonds and interest rates derivatives. EACH also suggests considering some other targeted adjustments.
- Porting – EACH Members are supportive of the Bank’s aim to increase the likelihood of client porting, and note that the Bank has indicated that its intention is to align with EMIR 3 in this respect.
- Uncollateralised bank guarantees – EACH strongly advocates for the inclusion of uncollateralised bank guarantees as eligible collateral under certain conditions.
- Permission and waivers – EACH Members agree and very much welcome the approach suggested by the Bank. We believe it is in line with the need to balance adequate rulemaking with effective growth and innovation by the private sector.
EACH Members would however like to caution against certain proposals that could potentially increase costs or harm innovation:
- Automatic porting without client consent and linking portability with default fund – The proposal to require CCPs to trigger porting without proactively seeking client consent is highly unlikely to be workable in practice. Also, linking default fund contributions to perceived portability could create unintended distortions in client account structures. We invite the Bank to consider other measures that would increase the likelihood of porting for prepared client such as, for instance, by (i) addressing the challenge regarding the limited duration of the porting period; (ii) allowing CCPs to share client portfolio and collateral data with alternate clearing members without requiring prior approval, and (iii) allowing individually segregated clients to designate back-up clearing members.
- The 25% flat rate of second skin in the game (SSITG) – A SSITG would, in our opinion, not be useful to further incentivise CCPs to perform robust risk management, as that purpose is already efficiently served by the “first” SITG. However, should the Bank nevertheless decide to include a SSITG, we suggest aligning with Art. 9(14) of the EU CCP Recovery and Resolution Regulation as we consider that the Bank’s proposal would lead to an inconsistency between the UK and EU approaches.
- Thresholds for materiality – We are of the opinion that the proposed quantitative triggers (notably the 5% change in service-level initial margin or other risk resources) are too low and insufficiently targeted. In practice, ordinary market movements and parameter updates may change aggregate initial margin by more than 5%, without any alteration to the underlying model logic.
- Proposals on transparency:
- Potential revel of proprietary information – The requirement to disclose detailed information on the initial margin model has the potential to allow market participants to replicate the model. This is concerning as it will expose proprietary algorithms and intellectual property that CCPs have developed.
- Provision of transparency to all market participants including clients – CCPs already provide a large amount of information to clearing members and their clients. Also, CCPs have no contractual relationship with end clients, therefore some information can only be provided by clearing members (e.g. additional add-ons charged by clearing members).
- Margin simulator – The Bank requires the simulator to include key historical market stress events for current and hypothetical portfolios. EACH believes that the margin tools provided by CCPs already give clearing members a high degree of flexibility in terms of testing any portfolio, existing or hypothetical alike. Also, CCPs typically and intentionally do not include historical (or hypothetical) scenarios.
- Reporting of non-material changes and extensions – Requiring CCPs to notify all model changes in advance and wait 10 business days before implementation would be disproportionate, particularly in times of market stress where CCPs need to be able to act swiftly.
Please see here the EACH response to the consultation on ensuring the resilience of CCPs, and here the EACH response to the consultation on the approach to rule permissions and waivers.
