Central counterparties in financial difficulties Expanding the UK regime
The expanded resolution regime implemented by the Act seeks to provide the Bank, as the UK resolution authority, with the necessary powers to stabilise a CCP, so that it can continue to provide its critical clearing services, preventing contagion spreading across the financial system; whilst ensuring CCPs and clearing members bear the losses arising from the failure, thereby protecting public funds.
	The Act provides the Bank of England with the following powers, to successfully perform a resolution:
Removal of material impediments to resolvability. This power would enable the Bank to require a CCP to make changes to remove potential barriers to its resolvability identified by the Bank;
Conditions and timing for entry into resolution and engagement between authorities. The Act sets the conditions that must be assessed before a CCP can be placed into resolution. This includes the power to enable the Bank to place a CCP into resolution before the CCP’s own recovery measures have been exhausted, on the condition that continued recovery actions by the CCP would likely ‘compromise financial stability’. The Bank will be required to consult HM Treasury on whether this new resolution condition is met;
Lockdown or deferral on the payment of dividends, buybacks or variable remuneration. This power would enable the Bank to temporarily restrict or prohibit any remuneration of equity for CCP shareholders or variable remuneration for the CCP’s senior staff in severe circumstances, including if there is a rapid deterioration in the financial situation of the CCP, and it was therefore at risk of failing. It would be available as an early intervention measure, but also after the CCP has entered resolution to ensure that all resources are directed to compensation payments and replenishing public funds where these have been used as a last resort, should either be necessary;
Power to suspend termination rights. This power would give the Bank the ability to temporarily stop any right to early termination of participation by a clearing member that arises as a result of a CCP being placed in resolution. This would help stabilise the clearing services offered by the CCP and ensure that the Bank has access to the largest possible pool of resources for loss absorbency, thereby limiting risks to public funds;
Power to take control of the CCP. This power would enable the Bank to take control of a CCP without having to rely on its existing property or share transfer powers. This would allow the Bank to enforce the CCP’s rulebook more easily to stabilise the CCP and ensure continuity of the critical clearing service in resolution without the legal and operational risk of conducting a property or ownership transfer;
Power to remove and replace directors. This would provide the Bank with the power to direct a CCP to remove or replace directors and senior managers and appoint temporary managers in severe circumstances, as the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) are already able to do for other types of financial services firms. Pre-resolution, it would only be used subject to a number of conditions, including if there was a rapid deterioration in the financial situation of the CCP and it was at risk of failing, or if there was a regulatory infringement by the directors or senior managers at the CCP;
Power to return the CCP to a matched book. The Bank will have the power to return a failing CCP to a ‘matched book’ to ensure that it does not continue to be exposed to losses generated by the positions of the defaulting clearing member(s)10. The Bank would have the flexibility to perform a full or partial termination of contracts, depending on the scenario and the potential wider impacts on financial stability. To provide clearing members and end users with greater certainty of how these powers would work in practice, the Bank will be required to set out how it intends to use these powers in the event of a CCP failure;
Power to perform variation margin gains haircutting (VMGH). This gives the Bank the ability to reduce (potentially to zero) the payments that a CCP would otherwise be required to make to clearing members whose positions have gained value. It will allow the Bank to go beyond what is permitted by the CCP’s own rulebook when doing this. This tool would only be available for use where the CCP’s losses are caused by clearing member default;
Further powers to generate additional loss absorbing capacity and replenish a CCP’s resources. The Bank will be given powers to write down unsecured liabilities (which can only be used in the case of non-default scenarios) and a statutory cash call power which enables the Bank to collect contributions from clearing members (in the case of both default loss and non-default loss scenarios). The Bank will be able to allocate losses and replenish a CCP’s resources through the mechanism that it judges least disruptive. There will be safeguards to stop the Bank writing down certain liabilities (e.g. initial margin) when using its write-down power. To enable clearing members to be aware of the level of resources that they might have to pay under the cash call power, the Act confers powers on HM Treasury to cap an individual clearing member’s contribution. The government currently envisage this cap to be at two times an individual member’s prefunded contribution to the default fund in a default-loss scenario, and three times in a non-default loss scenario;
Power to delay enforcement of a clearing member’s obligation in resolution. The Act confers a power on HM Treasury to make regulations enabling the Bank to delay enforcement of a clearing member’s obligations in resolution should such enforcement during the resolution of a CCP present a risk to financial stability. It is expected that the Bank would have the ability to enforce outstanding obligations resulting from a delay in enforcement at any time up to 18 months after the resolution, if at the relevant time the reasons for refraining from their enforcement no longer exist. If the Bank does not enforce an outstanding obligation within this 18-month period, the obligation will lapse at the end of it;
The Act also provides for a "no creditor worse off" (NCWO) safeguard. This safeguard ensures that creditors of the CCP have the right to compensation should they be worse off in resolution than they would have been in the absence of resolution action had the CCP entered insolvency.
	As part of their prefunded resources, UK CCPs are already required to hold a ring-fenced tranche of their own capital often referred to as "skin in the game" (SITG). HM Treasury intends for the Bank to be able to require CCPs to hold a second tranche of SITG sitting after the prefunded default fund, which would mean CCPs holding a greater amount of their own capital for loss absorption. The new powers granted to the Bank and HM Treasury under this Act could be used to introduce such a requirement.
	Together, the proposed powers and tools are intended to provide the Bank with a set of options to resolve a CCP in the most effective way, limiting risks to financial stability and public funds.