Draft statements of policy: The Bank of England's approach to permissions in relation to CCP rules

1: Introduction

1.1. These statements of policy (SoPs) set out the Bank of England’s (Bank’s) approach to giving permissions set out in the Bank of England FMI Rulebook: UK Central Counterparties Instrument (hereon CCP rules), in line with the SoP on the Bank of England’s approach to rule permissions and waivers. Where relevant, these SoPs also set out the Bank’s approach for variations to those permissions, and circumstances in which the Bank may take the decision to revoke a permission. When giving, varying or revoking these permissions, the Bank would exercise its powers under section 138BA (s138BA) of the Financial Services and Markets Act 2000 (FSMA), as applied by paragraph 10 of Schedule 17A to that Act.^{footnote [1]}

1.2. These SoPs are relevant to all recognised UK CCPs and systemic overseas CCPs.

1.3. As set out in the CCP rules, there are specific circumstances in which CCPs must apply to the Bank for prior permission before undertaking certain actions. Where a CCP wants to request a waiver or modification outside those specified in the CCP rules, the CCP must follow the process stated in the SoP on the Bank of England’s approach to rule permissions and waivers.

1.4. These SoPs set out the Bank’s approach to giving permissions which relate to:

1. Disclosure of information that is mandated by Bank rules in a modified manner, or non-disclosure of that information, as set out in rule 9.2 of the Management and Governance Part of the CCP rules;
2. Outsourcing of major activities linked to risk management, as set out in rule 2.2 of the Operational Resilience Part of the CCP rules;
3. Permission to enter into a new Interoperability arrangement, or make a material change to an existing interoperability arrangement, as set out in rule 2.1 and 2.2 of the Interoperability Arrangements Part of the CCP rules;

1.5. The Bank encourages early engagement by CCPs that are considering submitting an application for a permission, via their usual supervisory contact. The nature of this engagement will depend on the complexity and scale of the proposed application, and the CCP’s readiness to submit a formal application.

1.6. These SoPs should be read in conjunction with the CCP rules. The Bank is required to publish details of permissions that have been approved, unless it considers that it would be inappropriate or unnecessary to do so. In addition, in line with the SoP on the Bank’s approach to rule permissions and waivers, the Bank will publish information on how long it takes to make decisions on permissions applications.

The Bank of England’s approach to disclosure permissions [Disclosure, Management and Governance 9.2]

1: Overview

1.1. This SoP sets out the Bank’s approach to applications for disclosure permissions which allow a CCP to disclose information in a modified manner, or not disclose information whose publication is otherwise mandated by CCP rules, in accordance with rule 9.2 of the Management and Governance Part of the CCP rules.

1.2. When giving these permissions, the Bank would exercise its powers under s138BA of FSMA to give, vary or revoke a permission, based on the criteria set out below.

2: Initial application for permission

2.1. A CCP must submit an application to the Bank for permission to modify or withhold a disclosure, as set out in rule 9.2 of the Management and Governance Part of the CCP rules. This must be in writing and consist of a completed application form as set out in the Bank’s SoP on its approach to rule permissions and waivers and supporting evidence.

2.2. The application and supporting evidence should provide all of the following:

1. high-level information on the nature of the information disclosure, and the date from which the permission is required to come into effect;
2. the reason why the disclosure of the information would put at risk business secrets or the safety and soundness of the CCP;
3. where it is proposed that the information be disclosed in a modified manner, how this addresses the risks set out in point 2;
4. where it is proposed that the information not be disclosed, why the risks in point 2. cannot be addressed through disclosure in a modified manner; and
5. confirmation that no facts have been omitted which if known by the Bank could influence its decision regarding whether to give the permission.

3: Supporting evidence regarding the criteria for permission

3.1. Where a CCP seeks a permission for modifications to its disclosure requirements, the supporting evidence must contain sufficient information to allow the Bank to assess whether disclosure of the information would put at risk business secrets or the safety and soundness of the CCP, consistent with the requirement set out in Management and Governance Disclosure 9.2 in the CCP rules.

3.2. This supporting evidence should consist, as relevant, of the proposed modified information, the original documents, and any further relevant information or evidence of the risks that disclosure of the full information may pose, how disclosure in a modified manner would address this, or how the risks cannot be addressed through publication in a modified manner.

4: Assessment of the application – general

4.1. Where the Bank receives an application for a disclosure permission, and it decides to give permission, the Bank will, depending on the application received, permit the arrangement subject to conditions which may include the following:

1. a defined timeline or set of conditions for future full disclosure of such information;
2. changes to any proposed modifications to such information;
3. a requirement that information be published in a modified form, rather than not disclosed.

4.2. Where the Bank gives permission for modification or foregoing of disclosure requirements on appropriate grounds, the decision of the Bank will specify whether the permission given is that sought by the CCP or whether conditions have been applied.

Factors the Bank will consider

4.3. The Bank will base its permission or variation of permission on an assessment of the information provided, including but not limited to:

1. the impact of the information disclosure on the business secrets of the CCP;
2. the impact of the information disclosure on the safety and soundness of the CCP;
3. the impact of the information disclosure on financial stability more broadly;
4. the ability of the CCP to present the disclosure in a manner which limits the impact of such a disclosure on the stability of the CCP; and
5. any information on the outcome of past disclosure permissions, to the extent that such information can be reliably used to assess the expected outcome of future disclosure permissions.

Application timelines

4.4. The Bank will confirm receipt of the application of the CCP.

4.5. In general, the Bank expects to determine the outcome of an application within 30 business days, unless there are exceptional circumstances, which the Bank will aim to communicate in writing to the CCP on a timely basis. During this time the Bank will assess the completeness of the application and evaluate the information provided. An application will be considered complete by the Bank if the application covers all the matters set out in the above sections, “Initial application for permission” and “Supporting evidence regarding the criteria for permission”.

4.6. Where there are exceptional circumstances, the Bank expects to determine the outcome of a complete application within 90 business days from the receipt of the application.

4.7. Where the Bank has considered an application to be complete, this will not prevent the Bank from requesting additional information necessary for carrying out its assessment. The request should specify the additional information required and the reasons for the request.

4.8. Should the Bank need to request further information within these deadlines the Bank will specify the additional information requested and the reasons for the request. The day-count will pause until the requested information has been received, and an extra 10 business days will be added to the deadline. Any subsequent requests for information will not affect the deadline. Persistent failure to provide the requested information may result in rejection of the application.

4.9. The Bank will publish information on how long it takes to make decisions on permissions applications.

5: Decision on the application

5.1. When the Bank has reached a decision on an application, it will communicate this in writing to the CCP.

5.2. Where the Bank approves an arrangement subject to certain conditions, or rejects an application for permission, it will state the reasons on which the decision is based.

5.3. The CCP should not disclose the information prior to the outcome of the permission decision by the Bank.

6: Varying or revoking a permission

6.1. Where disclosure of the information requested under the permission is no longer deemed to have a material impact on;

1. business secrets of the CCP;
2. the safety and soundness of the CCP
3. financial stability;

6.2. The Bank will decide on either of the following actions:

4. to introduce new conditions or amend the conditions that the permission is subject to;
5. to revoke its permission.

6.3. If the Bank decides to amend the conditions of a permission or to revoke a permission, it will notify the CCP of its decision and provide the reasons for it. Where the CCP is aware of a change in circumstance whereby the disclosure may no longer have a material impact on the criteria set out in 3.1 it should inform the Bank of this change in circumstance.

The Bank of England’s approach to outsourcing permissions [Outsourcing, Operational Resilience 2.2]

1: Overview

1.1. This SoP sets out the Bank’s approach to applications for outsourcing permissions which allow a CCP to outsource major activities linked to risk management in accordance with rule 2.2 of the Operational Resilience Part of the CCP rules.

1.2. All references to outsourcing of major activities linked to risk management are to be taken as meaning ‘material third party arrangements’ as defined in the Bank’s Supervisory Statement on “Operational resilience: Outsourcing and Third Party Risk Management: central counterparties”. These are defined as those where disruption or failure of the products or services provided to the CCP could pose a risk to the continuity of service provided by the CCP or the safety and efficiency of the CCP’s clearing services, irrespective of whether the relationship is an outsourced or non-outsourced third party arrangement, and including intragroup outsourcing.

1.3. When giving these permissions, the Bank would exercise its powers under s138BA of FSMA to give, vary or revoke a permission, based on the criteria set out below.

2: Initial application for permission

2.1. A CCP must submit an application to the Bank for a permission for outsourcing of major activities linked to risk management, as set out in rule 2.2 of the Operational Resilience Part of the CCP rules. This must be in writing and consist of a completed application form as set out in the Bank’s SoP on its approach to rule permissions and waivers and supporting evidence.

2.2. The application and supporting evidence should provide all of the following:

1. A completed version of the template required under rule 2.1 of the Notifications and Regulatory Reporting for CCPs Part of The Bank of England FMI Rulebook (to note that the Bank would consider this to be a notification under this rule);
2. Confirmation that the CCP has met and continues to meet the requirements set out in the Outsourcing chapter of the Operational Resilience Part of the CCP rules and the expectations set out in the CCP Outsourcing Supervisory Statement in relation to the service; and
3. Confirmation that no facts have been omitted which if known by the Bank could influence its decision regarding whether to approve an outsourcing arrangement.

3: Supporting evidence regarding the criteria for permission

3.1. Where a CCP seeks a permission for the outsourcing of major activities linked to risk management, the supporting evidence must contain sufficient information to allow the Bank to assess whether the application complies with the requirements set out in the Outsourcing chapter of the Operational Resilience Part of the CCP rules and the expectations set out in the CCP Outsourcing Supervisory Statement.

3.2. This supporting evidence should consist of the proposed written agreement for the outsourcing arrangement and documentation relating to the steps the CCP has taken to:

1. define, record, and understand their and the third parties’ respective responsibilities in respect of data transferred between the parties, and measures taken to protect that data;
2. ensure effective access, audit and information rights in relation to premises, data, devices, information, systems and networks used for providing the service or monitoring its performance;
3. assess the relevant risks of sub-outsourcing before entering into the outsourcing agreement, where appropriate; and
4. ensure appropriate and proportionate business continuity policies and procedures are in place, and sufficient resources are devoted to ensuring that its important business services are available, reliable and resilient.

3.3. Where the information set out in points 1 to 4 is included in the proposed written agreement for the outsourcing arrangement, the CCP should note the relevant part or parts of that written agreement.

4: Assessment of the application – general

4.1. Where the Bank receives an application for an outsourcing permission, and it decides to give permission, the Bank will, depending on the application received, permit the arrangement subject to conditions which may include the following:

1. A defined timeline and process through which the transition to the outsourcing arrangement takes place, which may include intermediate steps and checkpoints;
2. A requirement for CCPs to have alternative means of delivering the outsourced service should the outsourced service provider fail; and
3. A requirement that the CCP may not outsource the activity until the contract has been entered into.

4.2. Where the Bank gives permission for the outsourcing of major activities linked to risk management, the decision of the Bank will specify whether the permission given is that sought by the CCP or whether conditions have been applied.

Factors the Bank will consider

4.3. The Bank will base its permission or variation of permission on an assessment of the information provided and on whether the arrangement meets the expectations set out in the Bank’s Supervisory Statement on “Operational resilience: Outsourcing and Third Party Risk Management: central counterparties”, including but not limited to:

1. the risk that the proposed outsourcing arrangement could pose to major activities linked to risk management of the CCP, taken as meaning ‘material third party arrangements’ as defined in the Bank’s Supervisory Statement on “Operational resilience: Outsourcing and Third Party Risk Management: central counterparties”, and on financial stability more broadly;
2. the design of the proposed outsourcing arrangement, including in the allocation of responsibilities between the CCP and the outsourced service provider, access to information, and assessment of the risks of sub-outsourcing;
3. the governance arrangements put in place for the proposed outsourcing arrangement, in particular through ensuring that the CCP’s board and senior management remain accountable for complying with regulatory obligations;
4. the business continuity plans put in place to ensure that a CCP’s important business services are available, reliable and resilient. even in the event of a serious outage of the outsourced arrangement; and
5. any information on the outcome of past outsourcing decisions by the CCP, to the extent that such information can be reliably used to assess the expected outcome of future outsourcing decisions.

Application timelines

4.4. The Bank will confirm receipt of the application of the CCP.

4.5. In general, the Bank expects to determine the outcome of an application within 80 business days, unless there are exceptional circumstances, which the Bank will aim to communicate in writing to the CCP on a timely basis. During this time the Bank will assess the completeness of the application and evaluate the information provided. An application will be considered complete by the Bank if the application covers all the matters set out in the above sections, “Initial application for permission” and “Supporting evidence regarding the criteria for permission”.

4.6. Where there are exceptional circumstances, the Bank expects to determine the outcome of a complete application within six months from the receipt of the application.

4.7. Where the Bank has considered an application to be complete, this will not prevent the Bank from requesting additional information necessary for carrying out its assessment. The request should specify the additional information required and the reasons for the request.

4.8. Should the Bank need to request further information within these deadlines, the Bank will specify the additional information requested and the reasons for the request. The day-count will pause until the requested information has been received, and an extra 30 business days will be added to the deadline. Any subsequent requests for information will not affect the deadline. Persistent failure to provide the requested information may result in rejection of the application.

4.9. The Bank will publish information on how long it takes to make decisions on permissions applications.

5: Decision on the application

5.1. When the Bank has reached a decision on an application, it will communicate this in writing to the CCP.

5.2. Where the Bank approves an arrangement subject to certain conditions, or rejects an application for permission, it will state the reasons on which the decision is based.

5.3. Where the Bank permission has been given, the CCP should, without undue delay, enter into the contract, on the terms on which the permission was based, and provide a copy of the signed contract to the Bank.

6: Varying or revoking a permission

6.1. Where an outsourcing arrangement no longer fulfils the conditions under which the permission for the arrangement was given, the Bank will decide on either of the following actions: a) to introduce new conditions or amend the conditions that the permission is subject to; or b) to revoke its permission for the outsourcing arrangement and give a timeline for alternative arrangements to deliver the relevant service to be in place.

6.2. If the Bank decides to amend the conditions of a permission or to revoke a permission, it will notify the CCP of its decision and provide the reasons for it. Where the CCP is aware of a change in circumstance whereby the outsourcing arrangement may no longer fulfil the conditions under which the permission for the arrangement was given, it should inform the Bank of this change in circumstance.

The Bank of England’s approach to interoperability permissions [Interoperability Arrangements 2.1 – 2.2]

1: Overview

1.1. This SoP sets out the Bank’s approach to applications for interoperability permissions which allow a CCP to enter into a new interoperability arrangement, or make material changes to an existing arrangement, in accordance with rules 2.1 and 2.2 of the Interoperability Arrangements Part of the CCP rules.

1.2. When giving these permissions, the Bank would exercise its powers under s138BA of FSMA to give, vary or revoke a permission, based on the criteria set out below.

2: Initial application for permission

2.1. A CCP must submit an application to the Bank for permission to enter into an interoperability arrangement, as set out in rule 2.1 of the Interoperability Arrangements Part of the CCP rules. This must be in writing and consist of a completed application form as set out in the Bank’s SoP on its approach to rule permissions and waivers and supporting evidence.

2.2. The application and supporting evidence should provide all of the following:

1. high-level information on the nature of the interoperability arrangement being proposed, the CCPs involved in the arrangement, and the proposed date that the service will start to be provided;
2. confirmation that the applicant CCP will meet the requirements set out in the Interoperability Arrangements Part of the CCP rules in relation to the proposed interoperability arrangement; and
3. confirmation that no facts have been omitted which if known by the Bank could influence its decision regarding whether to give the permission.

3: Supporting evidence regarding the criteria for permission

3.1. Where a CCP seeks a permission to enter into an interoperability arrangement, the supporting evidence must contain sufficient information to allow the Bank to assess whether the application complies with the requirements set out in the Interoperability Arrangements Part of the CCP rules, and the “Factors the Bank will consider” set out in this SoP.

3.2. The Bank expects applications for permission under s138BA FSMA to be accompanied by detailed information and evidence demonstrating how the relevant criteria are met. Where necessary to allow a decision to be made, the Bank will request additional detail or information not provided in the application, or will ask for the clarification of information that is not clear.

3.3. This supporting evidence should, at a minimum, include:

1. Current implementation plan, including target launch/implementation date and key dependencies.
2. Key governance documents including committee papers and minutes, and an independent validation report and management response, or a completed action log.
3. Business case for the application.
4. Self-assessment by the CCP against the regulatory requirements of the Interoperability Arrangements Part of the CCP rules, including the reasoning and evidence necessary to demonstrate compliance (i.e. not just an assertion of compliance), which may cross-refer to other materials in the application.
5. New trade list: a full list of all trade types that are proposed to be cleared through the interoperability arrangement, or a complete description of any new eligibility criteria for cleared trades. This list should specify all important contract specifications, such as maturities, settlement type, settlement values, variation margin currency, settlement venue, and trade source.
6. Trade sources: information on the trade sources that are expected to be live at launch, e.g. names of existing trading venues or a short description of the matching and registration process.
7. Price sources: information on the data sources used to price the new trades in order to calculate variation margin, initial margin and stressed loss for each new trade. Where multiple price sources are needed, the time period of each one used should be provided. Where proxy data are needed, detail on how the proxy is used, including any adjustments made, should be provided.
8. Risk models: information on the models that will be used to compute variation margin and initial margin (including additional collateral called for inter-CCP margin) and stressed losses, including details on key model parameters. This should include information on how the forecasted profit and loss of the new trades will be netted with one another and any existing trades when calculating margin requirements and stress losses, the new stress scenarios (if any) that will be introduced, and the existing scenarios that will be updated to cover the new trades.
9. Margin exchange and depositing arrangements: information on the exchange of inter-CCP margin, including timings and frequency, and where the margin will be lodged.
10. Settlement process: information on how the new contracts will be settled, with step-by-step worked examples where the process will be different to existing processes.
11. Default management: information on how the new trades will be managed and the role of each interoperable CCP in a default, such as whether the new trades will be hedged and/or auctioned alongside existing trades or separately.

4: Assessment of the application – general

4.1. A CCP is required to obtain a permission under s138BA FSMA from the Bank before entering into an interoperability arrangement. Where the Bank receives an application for an interoperability arrangement permission, and it decides to give permission, the Bank will, depending on the application received, permit the arrangement which may be subject to conditions. In addition, as set out in rule 2.2 of the Interoperability Arrangement Part of the CCP rules, a CCP is required to obtain a permission from the Bank under s138BA FSMA prior to making material changes to an existing interoperability arrangement.

4.2. Where the Bank gives permission for an interoperability arrangement, the decision of the Bank will specify whether the permission given is that sought by the CCP or whether conditions have been applied.

Factors the Bank will consider

4.3. The Bank will give permission for an interoperability arrangement under s138BA FSMA only where:

1. each of the CCPs involved is either a UK CCP that has been authorised by the Bank to provide clearing services in the UK, or an overseas CCP recognised under s300EA FSMA;
2. the requirements laid down in the Risk Management Requirements Chapter of the Interoperability Arrangements Part of the CCP rules are met; and
3. the technical conditions for clearing transactions under the terms of the arrangement allow for a smooth and orderly functioning of financial markets and the arrangement does not undermine the effectiveness of supervision.

4.4. In assessing an application for an interoperability permission, the Bank will apply the following standards at a minimum. However, the Bank will always consider the specific circumstances of each case:

1. Level of inter-CCP margin: a CCP should, at a minimum, calibrate and collect inter-CCP margin equal to at least the level of pre-funded resources that it would collect in initial margin and default fund contributions combined from a clearing member with the same positions.
2. Source of inter-CCP margin: inter-CCP margin posted by one CCP to an interoperable CCP should be separate from, and additional to, the margins already collected by the interoperable CCP to cover its exposures to its own clearing members.
3. CCP default resources other than inter-CCP margin: a CCP should, at a minimum:
   • include exposures to interoperable CCPs when calculating its exposure to its largest two members in extreme but plausible market conditions and use this to size the default fund and other pre-funded resources it holds; and
   • make the default fund it holds available to meet losses incurred following the default of an interoperable CCP.
4. Loss allocation rules and post-default arrangements: the Bank will not expect a CCP to allocate losses that exceed its pre-funded resources to interoperable CCPs. The Bank will review any voluntary arrangements agreed between CCPs and their respective regulators on a case-by-case basis.

Application timelines

4.5. The Bank will confirm receipt of the application of the CCP.

4.6. In general, the Bank expects to determine the outcome of an application within 80 business days, unless there are exceptional circumstances, which the Bank will aim to communicate in writing to the CCP on a timely basis. During this time the Bank will assess the completeness of the application and evaluate the information provided. An application will be considered complete by the Bank if the application covers all the matters set out in the above sections, “Initial application for permission” and “Supporting evidence regarding the criteria for permission”.

4.7. Where there are exceptional circumstances, the Bank expects to determine the outcome of a complete application within six months from the receipt of the application.

4.8. Where the Bank has considered an application to be complete, this will not prevent the Bank from requesting additional information necessary for carrying out its assessment. The request will specify the additional information required and the reasons for the request.

4.9. Should the Bank need to request further information within these deadlines, the Bank will specify the additional information requested and the reasons for the request. The day-count will pause until the requested information has been received, and an extra 30 business days will be added to the deadline. Any subsequent requests for information will not affect the deadline. Persistent failure to provide the requested information may result in rejection of the application.

4.10. The Bank will publish information on how long it takes to make decisions on permissions applications.

5: Decision on the application

5.1. When the Bank has reached a decision on an application, it will communicate this in writing to the CCP.

5.2. Where the Bank approves an arrangement subject to certain conditions, or rejects an application for permission, it will state the reasons on which the decision is based.

6: Varying or revoking a permission

6.1. Where an interoperability arrangement no longer fulfils the conditions under which the permission for the arrangement was given, the Bank will decide on either of the following actions: a) to introduce new conditions or amend the conditions that the permission is subject to; or b) to revoke the permission given under s138BA FSMA.

6.2. If the Bank decides to amend the conditions of a permission or to revoke a permission, it will notify the CCP of its decision and provide the reasons for it. Where the CCP is aware of a change in circumstance whereby the interoperability arrangement may no longer fulfil the conditions under which the permission for the arrangement was given, it should inform the Bank of this change in circumstance.

6.3. Permission can be revoked if a CCP is in breach of any requirements set out in the Interoperability Arrangements Part of the CCP rules, including the general requirements, risk management requirements and requirements regarding the provision of margin set out in that Part. The Bank would exercise its power to revoke an interoperability arrangement permission in a proportionate manner.

7: Permission for a material change to an existing interoperability arrangement

7.1. When the Bank issues a permission to enter into a new interoperability arrangement, the permission will be conditional on the information provided. If a material change to the arrangement is proposed, the CCP proposing the change is required to apply for the Bank’s permission prior to implementing the change, as set out in rule 2.2 of the Interoperability Arrangement Part of the CCP rules. If a material change is made without a permission, then the processes detailed in the section ‘Varying or revoking a permission’ will apply.

7.2. The process described in the section “Initial application for permission" will apply. The CCP should submit an application for permission in line with the process described in that section. The application should detail the proposed change and provide relevant supporting evidence enabling the Bank to assess the proposed change against the considerations set out in the section “Factors the Bank will consider”.

7.3. The Bank considers a change to an interoperability arrangement to be material if the change meets any of the following criteria:

1. the inclusion of a new product or set of products to be cleared over the interoperability arrangement that have a materially different risk profile to existing products cleared over the link;
2. the extension of an existing interoperability arrangement to include additional CCPs or clearing services;
3. a material change in the procedures for calculating, calling, and collecting collateral from an interoperable CCP; or
4. a change in the procedures for managing a default that relates to an interoperable CCP.

7.4. Where a proposed material change to an interoperability arrangement also meets the threshold for a material change to a model under the Review and Testing of Models and Parameters Part of the CCP rules, and / or a variation of recognition, the applicant CCP should provide a separate permission application.