Draft statement of policy: The Bank of England's approach to comparable compliance permissions

1: Introduction

1.1. This Statement of Policy (SoP) sets out the Bank of England’s (‘the Bank’) approach to giving a regulatory permission to recognised non-UK central counterparties (CCPs) on the basis of comparable compliance (a ‘comparable compliance permission’). This is set out in the Bank of England FMI Rulebook: Overseas Central Counterparties Instrument (hereon Overseas CCPs Part of the CCP rules). Where relevant, this SoP also sets out the Bank’s approach to variations to that permission, and the circumstances under which the Bank may take the decision to revoke that permission. When giving, varying or revoking a comparable compliance permission, the Bank would exercise its powers under section 138BA (s138BA) of the Financial Services and Markets Act 2000 (FSMA).^{footnote [1]}

1.2. Under [s300ED(4) and s300EF(1)] of FSMA, the Bank is required to consider whether to determine that a non-UK CCP applying for UK recognition is systemically important, or likely to become systemically important, to UK financial stability. Where the Bank makes such a determination, it will designate that CCP as ‘systemic’; where it considers that it will not do so, it will designate that CCP as ‘non-systemic’. This process is referred to as ‘tiering’ and the approach is set out in the Bank’s SoP – the Bank of England’s approach to tiering non-UK central counterparties (herein referred to as the Tiering SoP).^{footnote [2]} A non-UK CCP that is designated as systemic will, once it is recognised, be subject to direct UK supervision and regulation through the application of certain Bank rules to it (in accordance with rule 3.1 of the Overseas CCPs Part of the CCP rules). Where a non-UK CCP is designated as non-systemic, after the CCP is recognised the Bank will rely on the supervision and regulation of the home authority.^{footnote [3]}

1.3. This SoP is relevant to recognised non-UK CCPs (‘overseas CCPs’), and non-UK CCPs applying for UK recognition, that have been designated as systemic by the Bank in accordance with [s300EF(1)] of FSMA, and in line with the Bank’s Tiering SoP. This SoP regarding comparable compliance is also relevant to systemic non-UK CCPs’ home authorities. It should be read alongside the Tiering SoP.

1.4. Comparable compliance permissions are uniquely applicable to systemic overseas CCPs and non-UK CCPs applying for UK recognition that have been designated as systemic. As such, the process for comparable compliance permissions, which is set out in this SoP, differs to the process for permissions set out in the Statement of Policy – The Bank of England’s approach to rule permissions and waivers.

1.5. Overseas CCPs that are designated as systemic are subject to various Parts of the CCP rules on an ongoing basis as specified under rule 3.1 of the Overseas CCPs Part. However, such a CCP may submit an application for the Bank to give a comparable compliance permission in relation to all, or some of, the CCP rules which the CCP is subject to under rule 3.1 of the Overseas CCPs Part. Such permissions, where they are given by the Bank, would allow modifications to the application of the CCP rules listed under rule 3.1 of the Overseas CCPs Part, or the waiver of the application of rule 3.1 to disapply some or all of the CCP rules specified under rule 3.1 of the Overseas CCPs Part.

1.6. The basis for the Bank’s decision to give a comparable compliance permission will be the extent to which the Bank considers that comparable supervisory outcomes are achieved through the CCP’s compliance with its home regime in relation to the CCP rules to which the CCP is subject under rule 3.1 of the Overseas CCPs Part.

1.7. The purpose of this SoP is to set out the Bank’s approach to assessing such applications from CCPs for comparable compliance permissions.

1.8. The Bank encourages early engagement from CCPs that are considering making an application regarding comparable compliance permissions. 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.

1.9. This SoP should be read in conjunction with the Overseas CCPs Part of the CCP rules and the relevant Parts that apply to systemic overseas CCPs. It should also be read alongside the Tiering SoP referred to at paragraph 1.2.

2: The Bank’s approach to comparable compliance permissions

2.1. This section sets out the Bank’s approach to assessing applications from CCPs to give comparable compliance permissions.

2.2. The Bank will follow three principles for the assessment of such applications:

Principle 1: The Bank expects to give comparable compliance permissions in respect of rules in specific areas where the Bank considers comparable supervisory outcomes are achieved through the home regime.

2.3. Where an application has been submitted, the Bank will assess comparable compliance against individual requirements for an overseas CCP that has been designated as systemic. This assessment will be done at the level of the individual CCP. For areas where the Bank considers comparable supervisory outcomes are achieved through the home regime, the Bank will defer to the home authority by giving a comparable compliance permission in respect of the Bank rules in those specific areas.

Principle 2: The Bank will assess the requirements applied to the applicant CCP and how these requirements are applied under the supervisory approach of its home regime to determine whether comparable supervisory outcomes are achieved.

2.4. In order to determine whether comparable supervisory outcomes are achieved, the Bank will assess how the home authority applies and supervises against the home requirements, as well as assessing the requirements themselves.

2.5. The Bank will also assess whether there is sufficient supervisory co-operation and engagement in order to have enough visibility over the home authority’s supervisory approach and assurance that comparable supervisory outcomes are being achieved on an ongoing basis.

Principle 3: The Bank will assess how the home regime requirements in aggregate may deliver comparable outcomes to those CCP rules to which systemic overseas CCPs are subject under rule 3.1 of the Overseas CCPs Part.

2.6. In order to determine whether compliance with an applicable home regime may be deemed to satisfy the requirements set out in the relevant CCP rules on an outcomes basis, the Bank will focus on supervisory outcomes, rather than any specific element in isolation. This means the assessment will take into consideration all relevant elements, and determine whether, in the Bank’s judgement, comparable outcomes are achieved.

Three-step process to assessing comparable compliance

2.7. With the three principles in mind, the Bank will follow a three-step process to assess whether a CCP should be given a comparable compliance permission.

Step 1: Information gathering

2.8. In its application for a comparable compliance permission, the CCP must provide relevant information detailing how compliance with the applicable home regime’s framework satisfies compliance with the relevant requirements set out in in the CCP rules applicable to systemic overseas CCPs in accordance with rule 3.1 of the Overseas CCPs Part. The CCP should provide sufficient information detailing the requirements of the home regime such that the Bank can assess whether comparable supervisory outcomes are achieved through the home regime. A CCP may also submit supplementary information detailing its relevant internal rules and policy (such as a governance structure diagram, organisation charts, or risk governance framework) to aid the Bank in its assessment.

2.9. The Bank may request additional information either from the CCP or the home authority of the applicant CCP. This may include legal opinions, opinions of the home authority, letters of good standing, the supervisory framework and supervisory approach of the home authority, and how requirements are applied under the home regime.

2.10. With regard to the requirements under rule 3.1 of the Overseas CCPs Part, the Bank will use the information already submitted to the Bank by the home authority of the requesting CCP, to the extent appropriate. This includes information that may have been submitted by the home authority to inform the Bank’s advice to HM Treasury regarding the overseas regime designation for the relevant jurisdiction.

2.11. In addition, the Bank may also take into account information gathered as part of the informed reliance assessment conducted according to its tiering approach.

Step 2: Qualitative analysis

2.12. The Bank will conduct a qualitative analysis of the application and accompanying materials submitted by the CCP to assess whether comparable supervisory outcomes are achieved, such that the CCP may be deemed to satisfy compliance with requirements under the UK regime and therefore be given a comparable compliance permission.

2.13. The Bank may also consider other publicly available materials published by relevant international bodies to supplement its qualitative analysis, such as the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) ‘Level 2’ reports on the implementation of the Principles for Financial Market Infrastructures across the 28 jurisdictions of the Financial Stability Board (FSB), the CPMI or IOSCO and the Financial Sector Assessment Program (FSAP) of the International Monetary Fund (IMF).

Step 3: Decision

2.14. The Bank will make a decision on whether to give a comparable compliance permission based on the outcome of the previous steps. The Bank’s decision will be made on the basis of an assessment of all applicable requirements and relevant information in aggregate.

2.15. In any area(s) where comparable outcomes are identified, the Bank may determine that the application of requirements from the home regime provides a comparable outcome to the requirements under the UK regime. Therefore, the Bank will, on the condition that this assessment remains valid, rely on compliance with the requirements of the home regime for compliance with the corresponding requirements under rule 3.1 of the Overseas CCPs Part. As such, the Bank will give permission that enables the person to waive the application of rule 3.1 or modify the application of rule 3.1 (such that relevant rules do not apply in part or in full or apply with modifications) in accordance with s138BA of FSMA. The Bank’s comparable compliance permission is given on the condition that the comparable compliance assessment remains valid. The Bank may also apply other conditions to its permission where appropriate in accordance with s138BA(4)(a) of FSMA.

2.16. In any area(s) where comparable outcomes are not identified, the CCP rules in such areas will continue to apply to the CCP, and the Bank will directly supervise the CCP in relation to those areas. Upon reaching its decision the Bank will provide the CCP with relevant information as to why comparable outcomes were not identified.

2.17. Decisions to give comparable compliance permissions may be subject to review (and withdrawal) by the Bank, as set out below.

Exemption and exceptions

2.18. In some cases, a specific requirement set out in rule 3.1 of the Overseas CCPs Part may raise issues in its application to the CCP, or compliance by the CCP, with the result that the requirement would be ineffective or inappropriate. This could include, for example, contexts where compliance would result in a breach of one or more provisions of the applicable home regime. In such cases, the Bank will factor such evidence into its decision on whether to give a comparable compliance permission.

2.19. The Bank will consider giving a comparable compliance permission regarding the requirements set out under rule 3.1 of the Overseas CCPs Part where the CCP has an exemption or applies an exemption under the applicable home regime that is comparable to any of the exemptions set out under UK EMIR Article 1(4) and (5). In this case, the CCP should provide evidence that the UK and home exemption are comparable.

The Bank’s supervisory approach where a comparable compliance permission has been given

2.20. In areas where the Bank has given comparable compliance permissions, compliance with the home regulatory framework, regulatory approvals given by the home authority and the supervision and enforcement regime of the home authority would satisfy compliance with the relevant UK requirements.

2.21. The Bank will not expect to engage in independent supervisory activities and conduct independent validations under the relevant rules applied by rule 3.1 of the Overseas CCPs Part, independent general investigations or independent reviews in areas where comparable compliance permission has been given.

2.22. This is without prejudice to the Bank’s statutory duties, including its supervisory responsibilities in relation to systemic overseas CCPs under [s300EJ] of FSMA and its powers to withdraw recognition subject to the conditions under [s300EK] of FSMA.^{footnote [4]}

2.23. Where comparable compliance permissions are given, the Bank will monitor and assess the appropriateness of comparable compliance on an ongoing basis. The Bank may need to enhance its co-operation and information sharing arrangements with the home authority in order to do this. If the Bank is not able to receive sufficient information and co-operation from the home authority to give assurance that comparable supervisory outcomes are achieved, the Bank will review the decisions regarding comparable compliance permissions for the relevant areas as set out below under ‘Review and withdrawal of comparable compliance permissions’.

Review and withdrawal of comparable compliance permissions

2.24. A review of the decision on giving a comparable compliance permission will be conducted by the Bank in the event of a change at or in relation to the CCP, the supervisory and regulatory framework of the home authority, or co-operation and information sharing with home authority. This includes changes in the CCP’s risk profile, supervisory outcomes achieved or achievable through comparable compliance, or in the status of its ongoing compliance with the conditions for recognition.

2.25. The Bank expects the CCP and/or its home authority to notify the Bank of changes set out in paragraph 2.24 in a timely manner.^{footnote [5]} The Bank may request updated information from the CCP and/or its home authority to help assess whether there have been, or are likely to be, changes set out in paragraph 2.24.

2.26. If the Bank determines its comparable compliance permission is no longer appropriate and hence should be withdrawn, the Bank will endeavour to inform the CCP and its home authority before making a decision to withdraw the comparable compliance permission.

2.27. In withdrawing a comparable compliance permission, the Bank will endeavour to provide an adaptation period, where feasible. This will be appropriate and proportionate to the reasons for the withdrawal of the comparable compliance permission, to minimise potential market disruption and any adverse effects on the financial stability of the UK or other jurisdictions in which the CCP may be operating.

Applications for a comparable compliance reassessment

2.28. The Bank will assess the merits of any subsequent application for a comparable compliance permission on a case-by-case basis, and will consider if there are reasonable grounds to proceed with a reassessment (for instance, if there is evidence of changes to the CCP’s operations and/or home regulatory regime). Where the Bank is satisfied that there are reasonable grounds, it will proceed with a reassessment.