## _cr16156

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---

### Executive summary
- Supervision has significantly strengthened; the Bank of England (BoE) is one of the leaders worldwide in shaping FMI reforms.
- Making the BoE lead supervisor for all FMIs enabled consistent implementation of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) across FMI types.
- Supervisory practices have become more formalized, disciplined, and standardized; FMI Directorate (FMID) staffing increased to nearly 65 FTE.
- Risk management improvements include governance reforms, CCP model upgrades, prefunding in largest retail payment systems, and increased focus on operational and cyber resilience.
- Ongoing work: margin models, recovery planning, operational risk management, and default management.

### Supervision of FMIs — governance, powers, and resources
- BoE responsibilities and legal basis:
  - BoE supervises recognized payment systems, CCPs, SSS and CSDs; does not supervise trade repositories (ESMA sole supervisor for EU TRs).
  - Principal legislation: Part 5 of the Banking Act 2009; Financial Services and Markets Act 2000 (FSMA); Uncertificated Securities Regulations 2001.
- Recognition and categorization:
  - FMIs are categorized by systemic importance: Category 1 (very significant disruption), Category 2 (some disruption), Category 3 (at most minor disruption).
- BoE supervisory enhancements:
  - Special FMID reporting to Deputy Governor for financial stability and dedicated decision-making committees.
  - Internal challenge sessions with quantitative experts (including PRA) for model validation.
  - Expectation: supervised FMIs perform annual self-assessment against PFMI.
- BoE statutory powers:
  - Request information, commission independent reports, make on-site inspections, approve rules, give directions; remedies under FSMA and Banking Act 2009 include publishing non-compliance, financial penalties, disqualifications, court orders, revocation of authorization.
- Resources:
  - FMID resources increased to nearly 65 FTE.
  - Recommendation: additional staff for system-wide risk management and quantitative/qualitative analysis.

### CCP robustness and international standards
- Importance:
  - LCH.Clearnet Ltd and ICE Clear Europe are systemically important at a global level; many U.K. FMIs systemically important nationally.
  - LCH.Clearnet Ltd is one of the largest CCPs globally; importance risen after G20 clearing mandate.
- Standards and gaps:
  - Adoption of PFMI and EMIR increased CCP robustness; PFMI do not prescribe detailed requirements for all risks.
  - Areas warranting further work: stress testing of financial resources; margin requirements; liquidity requirements; adequacy of CCPs’ loss absorbing capacity.
  - U.K. authorities encouraged to push for standards beyond PFMI.

### System-wide risks and interdependencies
- Observations:
  - BoE could enhance monitoring of interconnectedness between CCPs, financial institutions, and markets.
  - BoE conducted a study on pro-cyclicality effects of margin calls of the largest CCP.
  - BoE monitors commercial banks providing services to CCPs and reports to BoE Risk Forum.
- Suggested further analysis (examples from the Note):
  - How membership in multiple CCPs may have knock-on effects on surviving clearing members.
  - Impact of fire sales if multiple CCPs sell collateral simultaneously.
  - FMIs’ dependency on banking services of a few U.S. global systemically important banks (G-SIBs).
- Actions to date:
  - Financial Policy Committee 2013 recommendation on cyber resilience program; CBEST developed in 2014.
  - Some FMIs completed CBEST; BoE planning a cyber security assessment tool for FMI and PRA supervisors.
- Resource needs:
  - Additional resources with quantitative skill sets required to conduct system-wide quantitative and qualitative analysis.

### Settlement banks, de-tiering, and central bank money
- De-tiering progress and scope:
  - Largest indirect participants of CHAPS and EUI transformed into direct participants in recent years.
  - Remaining scope: target other large banks still indirect to reduce credit, liquidity, and operational dependencies.
- Tiering statistics and targets:
  - CHAPS: Direct participants 22; Indirect participants 7,100.
  - EUI: 16 settlement banks; 219 users and 23,000 participants.
  - Bacs: 16 direct; 314 agency banks; 1,268 bureaux and 122,000 users.
  - FPS: 10 members and 1 agency; 400 indirect agencies.
  - LCH.Clearnet Ltd: 17 direct; 163 indirect (ranging from 38–98 per segment).
  - ICE Clear Europe: 9 direct; 81 indirect.
  - LME Clear: 10 direct; 43 indirect.
  - CME Clearing Europe: 5 direct; 18 indirect.
- CHAPS de-tiering detail:
  - Approximately half of the value of cleared transactions in CHAPS is still from indirect participants; expected to fall to approximately 30 percent as banks commit to direct membership during 2016.
- Central bank money and HVPS:
  - BoE provides CCPs access to its balance sheet and settlement in central bank money via the Sterling Monetary Framework and concentration bank accounts.
  - CCPs should increase the number of payments that settle entirely in central bank money using the High Value Payment System (HVPS).
  - BoE launched a strategic review of the RTGS system that could explicitly consider de-tiering and direct settlement of CCP transactions.

### Supervision of HVPS and RTGS oversight shortcomings
- Structural shortcomings:
  - BoE supervises CHAPS Co; CHAPS Co outsources infrastructure provision to the BoE via the RTGS system.
  - RTGS system is not subject to direct oversight; only a non-binding MOU exists between CHAPS Co and the RTGS operator.
  - CHAPS Co has limited powers to assess whether RTGS meets requirements or to induce change due to BoE’s dual role as operator.
- Assessments and options:
  - CHAPS Co has completed a self-assessment against international standards; BoE (as operator) has a self-assessment in progress.
  - BoE considering alternative oversight options, including organizational separation between oversight and operations (models: common central bank oversight, Bank of Canada model, Swiss National Bank model).
  - BoE announced plans to design a blueprint for the HVPS to consider RTGS evolution, access to central bank money, and role of the BoE.
- Critical service providers (CSPs):
  - PFMI Annex F oversight expectations for CSPs; assessment methodology published December 2014.
  - Outsourcing reliance: SWIFT (BoE participates in National Bank of Belgium’s oversight arrangements for SWIFT); VocaLink important CSP for FPS and Bacs.
  - BoE has yet to formally implement oversight expectations for CSPs.
- Recommendation timing and authorities (selected):
  - Finalize self-assessment of RTGS infrastructure against PFMI — Timing: Short to medium term — Authorities: BoE.
  - Assess compliance of critical service providers against CPMI-IOSCO oversight expectations — Timing: Medium term — Authorities: BoE.

### Crisis management, recovery and resolution
- BoE leadership:
  - BoE is a global leader in developing crisis management arrangements for FMIs and leads international colleges for U.K. CCPs.
- Domestic arrangements:
  - Comprehensive domestic structures set up; BoE chairs Crisis Management Group (CMG) for LCH.Clearnet Ltd.
  - MOUs governing colleges contain escalation procedures; further development needed for coordination in crisis scenarios (e.g., default of a clearing member in multiple CCPs).
  - Recommendation: enhance crisis management arrangements for supervisory colleges led by BoE through further development of crisis scenarios and testing — Timing: Medium term — Authorities: BoE and foreign authorities.
- Resolution framework for CCPs:
  - BoE is the resolution authority for CCPs; Part 8 of Financial Services Act 2012 provides powers to resolve through transfer of property or transfer of ownership.
  - Under statutory trigger, CCP can be placed into resolution before recovery tools are exhausted.
  - Resolution regime does not confer specific loss-sharing powers for CCPs.
  - U.K. authorities awaiting international consensus; an EU legislative proposal on CCP recovery and resolution expected in 2016.
  - Recommendation: further develop resolution framework for FMIs in line with international progress — Timing: Medium term — Authorities: BoE, HMT, international regulators.
- Information sharing:
  - Recommendation: develop information sharing arrangements with all authorities with interest in global CCPs while ensuring flexible decision-making (comparable to model proposed for G-SIB CMGs) — Timing: Medium term — Authorities: BoE and foreign authorities.
  - For LCH.Clearnet Ltd, BoE organized CMG; BoE should introduce processes for communication/cooperation with jurisdictions not on CMG but potentially systemically impacted.

### CCP-specific operational and liquidity arrangements
- Lines of defense:
  - Participation requirements, margining (initial and variation margin with daily mark-to-market and intraday calls), eligible collateral restricted to high quality assets, guarantee/default funds, and skin in the game.
  - LCH.Clearnet Ltd places own resources equal to 25 percent of its minimum net capital ahead of non-defaulting members’ mutualized default funds.
  - ICE Clear Europe committed USD 100 million as skin in the game for its Futures and Options segment; USD 25 million ahead of non-defaulting members for CDS plus another USD 25 million to CDS guarantee fund.
- Default fund sizing:
  - Sized to cover at minimum the sum of the two largest members’ stress-test losses in excess of margin; stress losses modeled daily; reverse stress testing for combinations of more than two members defaulting.
- Liquidity risk management:
  - Daily stress tests; LCH.Clearnet Ltd models liquidity out to 30 days; primary liquid resources: cash and highly marketable securities.
  - As of June 30, 2015, LCH.Clearnet Ltd had prearranged funding arrangements with 27 counterparties.
- BoE liquidity backstops:
  - CCPs have access to Sterling Monetary Framework, sterling concentration accounts, Operational Standing Facilities, and Discount Window Facility.
  - BoE announced on 29 March 2015 that its standing swap line with the European Central Bank could be used to facilitate multi-currency liquidity support to CCPs established in the U.K. and euro area.
- Contingent draw and further work:
  - A more systematic approach to estimate contingent draw on central bank liquidity is advisable, including liquidity needs of eligible non-U.K. CCPs and in currencies not covered by swap-lines.

### Key FMIs — structure and selected statistics (2014 and other figures as presented)
- CHAPS (HVPS):
  - Operated by CHAPS Clearing Company Limited (CHAPS Co); infrastructure provided by the BoE through the RTGS system.
  - 2014 average daily value of payments settled: nearly GBP 270 billion, from 144 thousand payment messages.
  - CHAPS members: 22 direct members.
- Retail payment systems:
  - Bacs: 2014 average daily value settled: GBP 17 billion, from 23 million payment messages; direct members 16.
  - Faster Payments Service (FPS): 2014 cleared and settled value: GBP 3.5 billion, from 4 million payment messages; 10 members and 1 agency; 400 indirect agencies.
  - Visa Europe: recognized as systemically important in March 2015.
- Securities and exchange-traded derivatives clearing (Average size of initial margin and default fund, GBP-equivalent, 2014):
  - LCH.Clearnet Ltd (equities): 827 million.
  - LCH.Clearnet Ltd (repos): 9 billion.
  - ICE Clear Europe: 18 billion.
  - LME Clear: 6 billion.
  - CME Clearing Europe: 151 million.
- OTC derivatives clearing (Average size, 2014):
  - LCH Swapclear: 23 billion.
  - LCH FX derivatives segment: GBP 338 million GBP-equivalent.
  - ICE Clear Europe (CDS): 5 billion.
- Central securities depository:
  - Euroclear U.K. & Ireland (EUI) / CREST: 2014 daily average settled: 677 billion GBP-equivalent (mainly sterling transactions).
- Table summary (selected totals, GBP-equivalent, millions):
  - CME Clearing Europe: Initial margin 16; Default fund 135; Total 151.
  - ICE Clear Europe — CDS: Initial margin 4,492; Default fund 876; Total 5,368.
  - ICE Clear Europe — Futures and options: Initial margin 17,593; Default fund 974; Total 18,567.
  - LCH.Clearnet Ltd — SwapClear: Initial margin 21,003; Default fund 2,577; Total 23,580.
  - LMC Clear: Initial margin 5,487; Default fund 391; Total 5,878.
- Daily average volume and value of recognized payment systems (2014, selected rows):
  - Bacs — Volume 23,087,866; Change 3; Value 17,473; Change 5.
  - CHAPS — Volume 144,352; Change 4; Value 268,615; Change -3.
  - EUI — Total: Volume 190,712; Change 1; Value 677,684; Change -18.
  - FPS — Volume 4,351,502; Change 14; Value 3,572; Change 17.

### CREST / EUI — role, settlement models, and residual risks
- Role in monetary policy and government securities:
  - BoE uses CREST to receive collateral for monetary policy operations and to provide intraday liquidity to eligible RTGS members.
  - CREST acts as U.K. Debt Management Office’s settlement agent for U.K. gilts and Treasury bills.
- EUI structure:
  - EUI is part of Euroclear Group; Euroclear SA/NV provides technical CREST services; Board of EUI provides CREST services to U.K. and Irish markets.
  - EUI’s International Service enables members to hold/settle foreign securities via links with DTCC, Euroclear Bank, and SIX SIS.
- Settlement models and residual risk:
  - Sterling and euro: DVP model 1 in central bank money with simultaneous and irrevocable transfer.
  - U.S. dollar: DVP model 2 in commercial bank money; CREST settlement banks discharge net bilateral US dollar payment obligations at end of day outside CREST.
  - Residual interbank credit risk for U.S. dollar settlements: 1.3 percent of EUI’s cash settlement — noted as not compliant with PFMI or CSD Regulation.
- Settlement banks and auto-collateralization:
  - EUI settlement banks: 16.
  - EUI and BoE support demand-driven auto-collateralization repo arrangements to increase intraday sterling liquidity.
- Operational resilience:
  - Euroclear’s business continuity: two synchronized data centers and a third asynchronously replicated data center located hundreds of kilometers away.

### Recommendations (selected and timing as presented)
- Supervision and oversight:
  - Consider alternative structures to reduce oversight/management constraints within U.K. HVPS; finalize RTGS self-assessment against PFMI — Timing: Short to medium term — Authorities: BoE.
  - Assess compliance of CSPs against CPMI-IOSCO oversight expectations — Timing: Medium term — Authorities: BoE.
  - Enhance crisis management arrangements for supervisory colleges led by the BoE; develop crisis scenarios and testing — Timing: Medium term — Authorities: BoE and foreign authorities.
- System-wide risk reduction:
  - Develop approach for analyzing interdependencies among CCPs, financial institutions and markets, including multi-membership, fire sales, and commercial bank services to CCPs — Timing: Short to medium term — Authorities: BoE.
  - Cooperate with U.S. supervisors to manage risks related to dependency of U.K. FMIs on U.S. banks — Timing: Short to medium term — Authorities: BoE, Federal Reserve.
  - Continue de-tiering project for payment systems and EUI — Timing: Medium term — Authorities: BoE.
  - Consider increasing settlement in central bank money for CCP embedded payment system transactions by increasing number of CCP members also members of the HVPS — Timing: Short term — Authorities: BoE.
- Recovery and resolution:
  - Further develop resolution framework for FMIs in line with international progress — Timing: Medium term — Authorities: BoE, HMT, international regulators.
  - Develop information sharing arrangements with all authorities with an interest in global CCPs while ensuring flexible decision making — Timing: Medium term — Authorities: BoE and foreign authorities.

*Source: IMF staff report chapter on U.K. FMIs (content unit _cr16156).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### _cr16156 - EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### Supervision of FMIs
- Supervision has significantly strengthened in recent years; the Bank of England (BoE) is one of the leaders worldwide in shaping reforms in this area.
- Making the BoE the lead supervisor for all FMIs enabled a consistent implementation of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) across all types of FMIs.
- Supervisory practices have become more formalized, disciplined, and standardized; the number of supervisory staff has increased.
- Combining FMI supervision under the BoE with PRA’s prudential supervision of FMI participants and central bank services allows an approach that focuses on the resilience of FMIs in a broader context.
- Risk management improvements in U.K. FMIs include:
  - Governance improvements required by the BoE across all types of FMIs.
  - Upgrades to CCP models for credit and liquidity risks and strengthened model validation procedures.
  - Largest retail payment systems introduced prefunding to mitigate settlement risk.
  - Increased focus on operational risk, with cyber resilience high on FMI agendas.
  - Ongoing work on margin models, recovery planning, operational risk management, and default management.

### CCP robustness and international standards
- Given systemic importance of U.K. CCPs domestically and globally, the BoE should ensure current requirements are commensurate with the risks.
- Adoption and implementation of the PFMI and development of legislation such as the European Market Infrastructure Regulation (EMIR) have increased CCP robustness.
- PFMI do not necessarily prescribe detailed requirements for all risks; further work internationally and domestically is warranted in areas including:
  - Stress testing of financial resources.
  - Margin requirements.
  - Liquidity requirements.
  - Adequacy of CCPs’ loss absorbing capacity.
- U.K. authorities are encouraged to continue pushing for increased robustness of CCPs, eventually adopting standards beyond the PFMI.

### System-wide risks and interdependencies
- The BoE could do more to monitor system-wide risks, particularly interconnectedness between CCPs, financial institutions, and markets.
- The BoE conducted a study on pro-cyclicality effects of margin calls of the largest CCP; regular monitoring of commercial banks providing services to CCPs has been initiated.
- Suggested further analysis (examples provided in the Note):
  - How membership in multiple CCPs may have a knock-on effect on surviving clearing members.
  - Impact of fire sales if multiple CCPs try to sell collateral at the same time.
  - FMIs’ dependency on banking services of a few U.S. global systemically important banks (G-SIBs).
- Such analysis would inform measures to reduce system-wide risks and requires additional resources with the right skill set to conduct quantitative and qualitative analysis and to further develop the supervisory approach.

### Settlement banks, de-tiering, and central bank money
- FMIs’ dependence on settlement banks should be further reduced through de-tiering and increased settlement in central bank money for CCP embedded payment systems.
- Progress: largest indirect participants of CHAPS and EUI have been transformed into direct participants in recent years.
- Scope remains to reduce credit, liquidity, and operational dependencies by targeting other large banks that are currently still indirect participants.
- BoE provides CCPs access to its balance sheet and settlement in central bank money through the Sterling Monetary Framework and provision of concentration bank accounts, but CCPs still depend on commercial banks for their embedded payment systems.
- CCPs should increase the number of transactions that settle entirely in central bank money using the U.K.’s High Value Payment System (HVPS).
- The BoE has launched a strategic review of the RTGS system; this review could explicitly consider de-tiering and direct settlement of CCP transactions.

### Supervision of the HVPS and RTGS oversight shortcomings
- Current arrangements have shortcomings:
  - BoE supervises CHAPS, which is operated by CHAPS Clearing Company Limited (CHAPS Co); CHAPS Co outsources infrastructure provision to the BoE via the RTGS system.
  - CHAPS Co has limited powers to assess whether the RTGS system meets requirements and to induce change, due to the BoE’s unique position as infrastructure provider.
- A self-assessment of the RTGS infrastructure by the BoE is underway; CHAPS Co has completed a self-assessment and the BoE has completed a supervisory assessment of CHAPS.
- In the absence of formal oversight of the RTGS system, pressure to increase compliance may be weak.
- The BoE recognizes these shortcomings and is actively considering solutions.

### Crisis management, recovery and resolution
- The BoE is a global leader in developing crisis management arrangements for FMIs, including recovery and resolution planning.
- Comprehensive domestic structures have been set up in the U.K. to manage crisis circumstances; the BoE leads international colleges for U.K. CCPs.
- Memoranda of Understanding (MOUs) governing colleges contain escalation procedures, but more is needed for successful cooperation and coordination in crisis, e.g., procedures for default of a clearing member in multiple CCPs.
- BoE has set up a Crisis Management Group (CMG) for authorities overseeing LCH.Clearnet Ltd as part of CCP resolution arrangements.
- Although current CMG membership is appropriate for flexibility, additional information sharing arrangements should be established with authorities not represented in the CMG but potentially systemically impacted (for example, jurisdictions whose currency is cleared or whose local banks are clearing members).

### Recommendations for FMI Supervision (from Table 1)
- Consider alternative structures to reduce current constraints related to oversight and management of risk within the U.K. High Value Payments system and finalize the self-assessment of the RTGS infrastructure against the PFMI.
  - Timing: Short to medium term
  - Authorities: BoE
- Assess compliance of critical service providers against the CPMI-IOSCO oversight expectations.
  - Timing: Medium term
  - Authorities: BoE
- Enhance crisis management arrangements for supervisory colleges that are led by the BoE, through further development of crisis scenarios and testing.
  - Timing: Medium term
  - Authorities: BoE and foreign authorities

Recommendations for the reduction of system-wide risks
- Further develop an approach for analyzing interdependencies among CCPs, financial institutions and markets that takes into account clearing members’ multi-membership of CCPs, fire sales of CCPs’ collateral and services provided to CCPs by commercial banks.
  - Timing: Short to medium term
  - Authorities: BoE
- Cooperate with U.S. supervisors to identify and manage risks related to dependency of U.K. FMIs on services provided by U.S. banks.
  - Timing: Short to medium term
  - Authorities: BoE, Federal Reserve
- Continue with the de-tiering project for payment systems and EUI.
  - Timing: Medium term
  - Authorities: BoE
- Consider, as part of the RTGS review, increasing settlement in central bank money for CCP embedded payment system transactions, by increasing the number of CCP members that are also members of the HVPS.
  - Timing: Short term
  - Authorities: BoE

Recommendations on recovery and resolution
- Further develop resolution framework for FMIs, in line with progress made at the international level.
  - Timing: Medium term
  - Authorities: BoE, HMT, international regulators
- Develop information sharing arrangements with all authorities with an interest in global CCPs, while ensuring a flexible decision making structure (comparable to model proposed for G-SIB CMGs).
  - Timing: Medium term
  - Authorities: BoE and foreign authorities

### Description of key FMIs and statistics (selected figures)
- CHAPS (HVPS):
  - Operated by CHAPS Co; infrastructure provided by the BoE through the RTGS system.
  - 2014 average daily value of payments settled: nearly GBP 270 billion, from 144 thousand payment messages.
- Retail payment systems considered systemically important:
  - Bacs: 2014 average daily value settled: GBP 17 billion, from 23 million payment messages.
  - Faster Payments Service (FPS): 2014 cleared and settled value: GBP 3.5 billion, from 4 million payment messages.
  - Visa Europe: card scheme and main processor of debit card transactions in the U.K.
- Securities and exchange-traded derivatives clearing:
  - LCH.Clearnet Ltd (equities): 2014 average size of the initial margin and default fund: 827 million GBP-equivalent.
  - LCH.Clearnet Ltd (repos): 2014 average size of the initial margin and default fund: 9 billion GBP-equivalent.
  - ICE Clear Europe: 2014 average size of the initial margin and default fund: 18 billion GBP-equivalent.
  - LME Clear: 2014 average size of the initial margin and default fund: 6 billion GBP-equivalent.
  - CME Clearing Europe: 2014 average size of the initial margin and default fund: 151 million GBP-equivalent.
- OTC derivatives clearing:
  - LCH Swapclear: 2014 average size of initial margin and default fund: 23 billion GBP-equivalent.
  - LCH FX derivatives segment: 2014 size: GBP 338 million GBP-equivalent.
  - ICE Clear Europe (CDS): 2014 initial margin and default fund size: 5 billion GBP-equivalent.
- Central securities depository:
  - Euroclear U.K. & Ireland (EUI) / CREST: 2014 daily average settled: 677 billion GBP-equivalent, mainly sterling transactions.

*UNITED KINGDOM  —  INTERNATIONAL MONETARY FUND*

### 6. Many U.K. FMIs are systemically important at the national level, while LCH.Clearnet

### _cr16156 - 6. Many U.K. FMIs are systemically important at the national level, while LCH.Clearnet

### Systemic importance and cross-border links
- LCH.Clearnet Ltd and ICE Clear Europe are considered to be systemically important at a global level.
- Many U.K. FMIs are systemically important at the national level.
- Risks from FMI failure:
  - Failure of one FMI can be a source of financial shocks and may potentially severely impact the stability of the U.K. or global economy.
  - Failure of a payment system or EUI can result in an ineffective implementation of monetary policies and a loss of confidence in the financial system.
  - As most global systemically important financial institutions participate in LCH.Clearnet Ltd and ICE Clear Europe, their failure may, in extreme circumstances, spread losses across international financial markets and global financial systems.
- Role and market positions:
  - LCH.Clearnet Ltd is one of the largest CCPs in the world; its importance is still growing following the G20 mandate that all standardized OTC derivatives should be cleared through CCPs.
  - ICE Clear Europe is a global player in CDS.
- Cross-border interoperabilities and links:
  - LCH.Clearnet Ltd is interoperable with CCPs from the Netherlands (EuroCCP N.V.) and Switzerland (SIX x-clear) for cash equity products and equity derivatives.
  - EUI has cross-border CSD links with CSDs in the United States (DTCC), Belgium (Euroclear Bank) and Switzerland (SIX SIS).
  - The links with DTCC and Euroclear Bank support free–of-payment transactions, while the SIX SIS link also supports delivery versus payment.
  - EUI doesn’t extend credit or liquidity to these linked CSDs.

### Overview of the supervisory and oversight framework
- Bank of England (BoE) responsibilities:
  - The BoE is the authority responsible for the supervision of systemically important FMIs in the U.K.
  - The BoE supervises recognized payment systems, CCPs, SSS and CSDs.
  - The BoE does not supervise trade repositories; ESMA is the sole supervisor of trade repositories established in the EU.
- Legal and institutional context:
  - Supervision of FMIs is based on various U.K. and EU laws (Appendix 4 referenced in source).
  - The BoE must provide a report to HM Treasury demonstrating how the BoE has met its financial stability objective through its supervision of recognized payment systems, CCPs and SSS; this report must then be laid before Parliament.
  - The regulatory regime for CCPs is based on EU legislation and CSDs are transitioning from domestic to EU legislation.
  - Three U.K. CCPs—CME Clearing Europe, LCH.Clearnet Ltd and LME Clear—have been authorized under EMIR. The BoE continues to assess ICE Clear Europe’s application.
  - SSS and CSDs continue to be assessed against domestic requirements until the regulatory technical standards under the EU CSD Regulation (CSDR) come into force.

### Assessment of selected issues — Supervision of FMIs (Regulation, supervision and transparency: Responsibilities A, C and D)
- Legislative basis and criteria:
  - Principal U.K. legislation shaping BoE FMI supervision:
    - Part 5 of the Banking Act 2009 (statutory oversight regime for interbank payment systems).
    - Financial Services and Markets Act 2000 (FSMA) (responsibilities and powers for supervision of CCPs and CSDs as Recognized Clearing Houses; to be restyled under U.K. implementation of the CSDR).
    - Uncertificated Securities Regulations 2001 (applies to operators of securities settlement systems, currently EUI as the U.K.’s only CSD).
  - The BoE publishes key resources, principles and objectives for FMI supervision on its website.
- Recognition and categorization:
  - The BoE makes recommendations to ensure systemically important FMIs are subject to its supervision.
  - For payment systems, the BoE only supervises systemically important interbank payment systems subject to certain criteria (HM Treasury recognition criteria summarized in footnote 4).
  - Entities established/incorporated in the U.K. and operating a CCP or CSD are required to be authorized by the BoE and therefore fall within the scope of BoE supervision.
  - FMIs subject to BoE supervision are divided into three categories depending on systemic importance:
    - Category 1 systems are the most significant systems which have the capacity to cause very significant disruption to the U.K. financial system.
    - Category 2 systems are significant systems which have the capacity to cause some disruption.
    - Category 3 systems have the capacity to cause at most minor disruption.
  - Supervisory governance and activities are defined per category.
- PFMI implementation and consistency:
  - The PFMI are implemented through legislation and policies of the BoE.
  - For CCPs and CSDs, PFMI are implemented through EU regulations, i.e. EMIR and the CSDR; these regulations are largely consistent with the PFMI.
  - The CPMI-IOSCO implementation monitoring exercise confirmed the U.K.’s high consistency with the PFMI (Appendix 5).
  - For recognized payment systems, the BoE publicly stated that it adopted the PFMI without amendment as the principles relevant for payment systems.
- BoE supervisory enhancements and practices:
  - The BoE has significantly strengthened FMI supervision with a special FMI Directorate (FMID) that reports directly to the Deputy Governor for financial stability and dedicated decision-making committees.
  - Internal BoE challenge sessions with quantitative experts (including counterparty and market risk experts from the PRA) scrutinize CCPs’ risk models as part of the model validation process.
  - BoE emphasis on governance: several FMIs have substantially reformed their board and committee structures at the instigation of the BoE; CCPs and clearing members invited to governance workshops.
  - Risk mitigation and operational focus:
    - The largest retail payment systems have introduced prefunding as a tool to mitigate settlement risk.
    - Increased focus on operational risk with cyber resilience high on the agenda.
    - Ongoing work in recovery planning, operational risk management and default management.
- Supervisory process:
  - Supervision of domestic FMIs consists of regular monitoring of key statistics and risk information.
  - The BoE expects supervised FMIs to perform an annual self-assessment against the PFMI; this serves as an input into the BoE’s own assessment.
  - The BoE also assesses FMIs against applicable EU regulations.
  - The BoE specifies Priorities and Observations indicating issues where the BoE seeks action from FMIs.
  - The BoE regularly defines sector broad themes; example: focus on quality of governance at U.K. CCPs to ensure commercial objectives are not inappropriately prioritized over systemic risk management.
- Shortcomings in HVPS supervision (CHAPS Co / RTGS arrangement):
  - The BoE supervises CHAPS Co, which outsources infrastructure provision to the BoE via the RTGS system; the RTGS system is not subject to direct oversight.
  - Current structure limits CHAPS Co and the BoE in conducting assurance and supervisory activities and in inducing change if needed.
  - There is no formal and binding contract between CHAPS Co and the RTGS system, other than a (non-binding) MOU.
  - The current structure is considered less effective to ensure a safe and smooth functioning of the RTGS system.
  - CHAPS Co has completed a self-assessment against international standards, which the BoE uses as input; the BoE as operator (Banking Directorate) has a self-assessment in progress.
  - In the absence of formal oversight of the RTGS system pressure to increase compliance may be weak.
- Options and planning:
  - The BoE is considering alternative options to enhance the supervisory structure, including models used by other central banks.
    - Common arrangement: RTGS operations overseen by central bank oversight function with organizational separation between oversight and operations (reporting lines to different senior managers or governors of the board).
    - Bank of Canada model: RTGS operated by a private entity supervised by the Bank of Canada.
    - Swiss National Bank model: outsourced RTGS operations to a private party while keeping ownership of the system.
  - The BoE announced plans to design a blueprint for the HVPS for the coming years; the blueprint aims to consider how the RTGS system needs to evolve, including technological innovation, access to central bank money, and the role of the BoE.
- Critical service providers (CSPs):
  - The BoE should include CSPs in its supervisory framework.
  - PFMI include oversight expectations for CSPs (Annex F) and published an assessment methodology in December 2014.
  - Outsourcing is a key issue for U.K. FMIs; many are reliant on SWIFT and the BoE participates in the National Bank of Belgium’s oversight arrangements for SWIFT.
  - VocaLink is an important CSP for FPS and Bacs.
  - The BoE has yet to formally implement the oversight expectations for CSPs.

### Powers and resources (Responsibility B)
- BoE statutory powers:
  - Banking Act 2009, FSMA, and the Uncertificated Securities Regulations grant the BoE powers to obtain timely information and induce change.
  - Specific powers include requesting information, commissioning independent reports, making on-site inspections, approving FMIs’ rules, and giving directions.
  - If BoE directions are not followed, additional powers under FSMA and the Banking Act 2009 include publishing details of compliance failures, imposing financial penalties, giving directions, disqualifications, seeking appropriate court orders and ultimately closure.
  - Ultimate sanction for a recognized system, CCP, or SSS is revocation of authorization.
  - The BoE expects to use its powers more frequently to commission independent expert reports into FMIs or require FMIs to commission such reports.
- Resources:
  - Resources in the FMID increased in recent years to nearly 65 FTE.
  - Additional staff are recommended to step up management of system-wide risks of FMIs, to conduct quantitative and qualitative analysis, and to implement a more system-wide approach in daily supervisory activities.

### Cooperation in normal and stress circumstances (Responsibility E)
- Domestic cooperation:
  - Domestic cooperation among U.K. authorities is effective in day-to-day supervision of FMIs.
  - Two levels of domestic cooperation agreements:
    - An MOU between the BoE, FCA and, where appropriate, the PRA, on cooperation in supervision of markets and market infrastructure.
    - An MOU between the BoE, FCA, PRA and PSR that sets out cooperation in relation to payment systems.
  - The MOUs are reviewed annually and subject to a public evaluation.
  - The first annual review of the MOU with the PSR is scheduled for Q2 2016.
- Sector-wide crisis management and exercises:
  - HM Treasury, the BoE, and the FCA conduct regular industry-wide exercising/testing to enhance operational resilience; an exercising program established in 2003 has delivered six large scale market-wide exercises.
  - FMIs play an active role in organization and execution of exercises; reports with key recommendations are shared with participants and authorities (which may include the BoE’s Financial Policy Committee).
  - Key cooperation mechanisms:
    - Authorities participate in industry exercises via the Authorities Response Framework (ARF), the collective framework to coordinate authorities and sectors’ response to major operational disruption.
    - The BoE (ED-Markets) chairs the Cross-Market Business Continuity Group, a strategic forum of major firms and FMIs to coordinate sector response during a crisis affecting wholesale markets.
    - The Cross-Market Operational Resilience Group is an out-of-crisis affiliate providing a forum for authorities and market participants, including all FMIs, to identify cross-sector risks, develop crisis management arrangements and test those.
    - The ARF and Cross-Market Business Continuity Group are regularly rehearsed as part of the exercising program; the Cross-Market Business Continuity Group composition has recently been reviewed to mirror the Cross-Market Operational Resilience Group and include all FMIs.
  - Crisis scenarios previously exercised included terrorism (2003–2005), flu pandemic (2006), severe weather (2009) and cyber/payments disruption (2011); more recent exercises included Waking Shark cyber desktop exercises (2011 and 2013), Retail Resilience Exercises (2013 and 2014) and an FX settlements (Blackbox) desktop exercise (2015).
- International cooperation:
  - Day-to-day cooperation with foreign authorities is streamlined through colleges.
  - The BoE cooperates with a range of foreign authorities in supervising U.K. CCPs, non-U.K. CCPs and non-U.K. FMIs (CLS, Euroclear Bank and SWIFT).
  - Under EMIR Article 18, the BoE is required to set up EMIR colleges for each U.K. CCP; these colleges have a formal role in initial authorization of a CCP, information sharing and coordinating assessments among European supervisors.
  - The BoE chairs global colleges for LCH.Clearnet Ltd and ICE Clear Europe that operate under MOUs and include a wider set of international authorities.
  - A key question for global colleges is how to balance effective coordination structures with inclusion of all relevant authorities.

*Source: IMF staff report chapter on U.K. FMIs (content unit _cr16156).*

### 24. Cooperation agreements with foreign authorities should include cross-border crisis

### 24. Cooperation agreements with foreign authorities should include cross-border crisis

### Cross-border crisis management and testing
- Cooperation agreements with foreign authorities should include cross-border crisis management arrangements, which are regularly tested.
- The BoE has introduced an ‘emergency protocol’ for each college that details arrangements for sharing information in a crisis and includes crisis contact lists.
- More is needed, in particular agreements on how to cooperate and coordinate in different crisis scenarios, such as the simultaneous default of a clearing member in multiple CCPs.
- A joint fire drill, agreed with the German authorities, involving a U.K. CCP and a German CCP was conducted in February 2016 as a constructive first step.
- Testing of such scenarios is important to identify particular cross-border communication issues during periods of market stress and improve management.
- Cooperation among authorities involved in CCP interoperability arrangements should develop a crisis management framework given the systemic relevance of the links.

### System-wide risks and interdependencies
- While supervision of individual FMIs is well established, further work is required at the system-wide level to identify systemic risks not visible at the individual FMI level.
- U.K. FMIs operate in an interdependent, interconnected network of financial institutions and markets; a system-wide perspective is important.

Findings and actions to date:
- In 2013, the Financial Policy Committee recommended that HM Treasury, the PRA, the BoE and the FCA put in place a program to improve and test cyber resilience in close cooperation with the U.K. financial system.
- Authorities have gained insight into cyber security practices of the U.K. financial sector, including FMIs. Weaknesses were fed back as 2015 supervisory Priorities.
- Firms are encouraged to complete CBEST tests and adopt individual cyber resilience action plans. CBEST was developed in 2014.
- Some FMIs have completed CBEST, some are undertaking testing, and several FMIs are negotiating and agreeing their test scope with the BoE.
- The BoE is planning to develop a cyber security assessment tool for FMI and PRA supervisors to assess an FMI’s cyber risk management capabilities.

BoE system-wide arrangements and gaps:
- The BoE has installed an internal BoE Risk Forum for FMIs issues to review system wide risks and established a BoE-wide task force to define a consistent risk appetite and approach to operational resilience in the financial sector.
- The BoE recently conducted a study on pro-cyclicality effects of margin calls of the largest CCP.
- The BoE monitors which financial institutions provide critically important services to U.K. FMIs and reports this regularly to the BoE Risk Forum.
- The plan to include CCPs in the BoE’s overall stress testing work is welcome.

Additional systematic and quantitative analysis needed to improve understanding of contagion channels:
- Membership of clearing participants in multiple CCPs and other FMIs:
  - Various financial entities participate in more than one CCP. The default of such a participant may cause severe distress to multiple FMIs and markets and may have a knock-on effect on surviving members.
  - The recent EU-wide CCP stress test exercise, undertaken by ESMA, confirms that such a knock-on effect is highly plausible.
  - The 2014 results for U.K. CCPs show that U.K. CCPs are robust to manage multiple (two or more) member defaults in a range of extreme-but-plausible market conditions (see Box 2).
- Impact of fire sales:
  - In case of a participant’s default CCPs may try to dispose of collateral to cover their losses. If several CCPs try to sell the same type of assets, collateral markets will tend to exhibit high volatility and price peaks.
- FMIs’ dependency on banking services of a few U.S. G-SIBs:
  - Although risks are mainly of an operational nature a more explicit understanding of the risks that a failure of these banks pose to FMIs is warranted, for example, by explicit attention to these risks as part of the joint supervision with U.S. regulators and drills pretending the default of one of these G-SIBs.
- Cooperation with U.S. supervisors is expected to contribute to the identification and management of these risks.

Tiering and de-tiering:
- Further de-tiering will help reduce the dependency of FMIs on settlement banks.
- Tiered participations create credit and liquidity exposures between settlement banks and participants as well as operational dependencies.
- The BoE has worked with CHAPS and EUI to turn the largest indirect participants into direct participants.
- CHAPS Co implemented formal tiering criteria to identify which indirect participants should join CHAPS directly.
- Dependencies remain high: approximately half of the value of cleared transactions in CHAPS is still from indirect participants. This is expected to fall to approximately 30 percent as banks that already committed to direct membership join during 2016.
- De-tiering will help address aspects of the too-big-to-fail nature of banks and align the U.K. with international practices where most banks have direct access to the RTGS system.
- The BoE has launched a strategic review of the RTGS system; this development could take further de-tiering explicitly into account.

Selected table of tiering levels (December 2014):
- CHAPS: Direct participants 22; Indirect participants 7,100
- EUI: 16 settlement banks; 219 users and 23,000 participants
- Bacs: 16 direct; 314 agency banks; 1,268 bureaux and 122,000 users
- FPS: 10 members and 1 agency; 400 indirect agencies
- LCH.Clearnet Ltd: 17 direct; 163 indirect (ranging from 38–98 per segment)
- ICE Clear Europe: 9 direct; 81 indirect
- LME Clear: 10 direct; 43 indirect
- CME Clearing Europe: 5 direct; 18 indirect

(For LCH.Clearnet Ltd the table information relates to payment and not clearing arrangements.)

### CCP-specific operational and liquidity arrangements
Settlement in central bank money:
- Settlement in central bank money should be pursued to reduce CCPs’ risk exposures to settlement banks acting within embedded payment systems.
- The BoE provides CCPs access to its balance sheet and to settlement in central bank money through the Sterling Monetary Framework and provision of concentration bank accounts; this has reduced dependencies on commercial banks.
- Despite this, CCPs are still dependent on commercial banks for the operation of their embedded payment systems.
- CCPs apply risk management practices to reduce exposures to settlement banks, such as setting minimum criteria for settlement banks and establishing payment deadlines.
- Recent rule changes introduced Extended Member Liability, meaning that CCPs do not incur credit exposures to payment banks intraday. All transfers, subject to certain conditions, are deemed final and therefore irrevocable.
- In line with the PFMI, settlement should be in central bank money when practical and available. CCPs should take actions to increase the number of payments that settle entirely in central bank money using the HVPS.
- Benefits include reducing tiering in embedded payment systems and increasing the proportion of bilateral payments between members and the CCP.
- Key requirement: increased membership of the HVPS by CCP members, under the condition that members have sufficient capacity to do so safely.
- CCPs themselves should become a member of the HVPS. Central bank provision of concentration accounts already ensures that payments settle in central bank money, but direct membership may reduce operational risk.
- At the time this report was drafted, the BoE was preparing to launch a strategic review of RTGS. The development of a potential new RTGS system could take further de-tiering explicitly into account.

BoE liquidity backstops for CCPs:
- The BoE provides CCPs with liquidity support through access to the Sterling Monetary Framework.
- CCPs already had access to sterling concentration accounts at the BoE allowing them to collect participants’ sterling cash collateral intraday with the BoE rather than a commercial bank.
- The BoE announced in 2014 that it will allow EMIR-authorized CCPs in the European Economic Area (EEA) (and ESMA-recognized CCPs established outside the EEA), operating in U.K. markets, to participate in its Sterling Monetary Framework.
- Access to Operational Standing Facilities will help CCPs manage unexpected sterling payment shocks.
- CCPs will have access to sterling liquidity insurance via the Discount Window Facility to backstop CCPs’ own management of their liquidity risk.
- Private sector liquidity must constitute the first line of defense for CCPs against liquidity shortfalls, but access to central bank liquidity can provide an ultimate backstop in extreme circumstances.

Foreign currency liquidity and swap lines:
- The BoE considers it important to be able to provide access to liquidity arrangements in other currencies CCPs clear.
- One potential source of foreign currency is the network of central bank swap lines.
- On 29 March 2015 the BoE announced that its standing swap line with the European Central Bank could be used, should it be necessary and without pre-committing to the provision of liquidity, to facilitate multi-currency liquidity support to CCPs established in the U.K. and euro area.

Contingent draw on central bank liquidity:
- A more systematic approach towards the estimation of the contingent draw on central bank liquidity implied by these arrangements could be established.
- The BoE has made calculations of CCPs’ liquidity needs in extreme circumstances to better understand the impact of potential liquidity support on the BoE’s reserves.
- Further development should include the liquidity needs of other CCPs, including eligible non-U.K. CCPs with potentially high liquidity needs.
- It would also be useful to estimate potential liquidity needs in other currencies, in particular those not covered through the network of central bank swap-lines.

Box 3 summary — Embedded payment systems of CCPs:
- All four U.K. CCPs operate their own embedded payment system; basic structure is similar with cash flowing from a settlement bank to a concentration bank to an investment agent before being secured in the market.
- A CCP’s embedded payment system is a collection of bank accounts governed by specific rules and legal protections. Reconciliation of net cash flows between settlement banks is conducted in RTGS systems (e.g., CHAPS for GBP or Fedwire for USD).
- Settlement bank: CCP approves several commercial banks as settlement banks; CCP has at least one account with each. Clearing members must hold an account with any one of these banks and fund it to meet margin payments. Due to Extended Member Liability, CCPs do not face intraday credit exposure to their settlement banks.
- Concentration bank: Net balances are transferred to the CCP’s concentration account. The BoE performs the role of sterling concentration bank.
- Investment agent: Secures funds in the market via reverse repos or outright security purchases; can be in-house (LCH.Clearnet Ltd) or outsourced.
- Payment system designations: LCH.Clearnet Ltd: Protected Payment System (PPS); ICEU: Assured Payment System (APS); LMEC: Secure Payment System (SPS); CMECE: No own name—referred to as embedded payment system.

### Recovery and Resolution
- The U.K. is well ahead of most advanced economies with development and implementation of recovery plans for FMIs.
- The regulatory framework requires CCPs to develop recovery plans and have loss-allocation rules for losses arising from a clearing member default and for investment losses.
- U.K. CCPs implemented a first draft of their recovery plans by February 1, 2014, with ongoing development since then.
- The CSDR requires EUI to develop a recovery plan prior to authorization; the BoE has already required EUI to develop one.
- There is no specific regulatory framework for payment systems to develop recovery plans; nevertheless, payment systems and the BoE have been working to further develop recovery plans in line with international guidance.

*Source: _cr16156 - 24. Cooperation agreements with foreign authorities should include cross-border crisis*

### 34. The U.K. is spearheading international efforts in developing resolution planning for

### 34. The U.K. is spearheading international efforts in developing resolution planning for CCPs

### Resolution framework for CCPs
- The Bank of England (BoE) is the only resolution authority responsible for CCPs, although the BoE must consult with HM Treasury and FCA, if applicable, whether certain conditions are met to determine whether a CCP enters into resolution.
- Part 8 of Financial Services Act of 2012 and secondary legislation give powers to resolve a failing CCP through:
  - transfer of property to either a private sector purchaser or a bridge CCP owned by the BoE, or
  - transfer ownership of a CCP to any person.
- Under the statutory trigger, a CCP can be placed into resolution before recovery tools are exhausted.
- The resolution regime does not confer on the resolution authority any specific loss-sharing powers for CCPs.
- U.K. authorities are awaiting international consensus before further progressing the resolution framework for FMIs.
- An EU legislative proposal on CCP recovery and resolution is expected in 2016.
- The BoE does not expect U.K. CCPs to introduce loss-allocation rules for non-default losses other than investment losses; losses related to general business risks are to be managed by owners of the FMI through other recovery tools, such as capital-raising, or insurance agreements.

### Resolution planning for payment systems and SSSs
- Resolution planning for payment systems and securities settlement systems (SSSs) is less developed.
- A Special Administration Regime for recognized interbank payment systems, operators of securities settlement systems (under the Uncertificated Securities Regulations) and firms designated as their CSPs was established by Part 6 of the 2013 Financial Services (Banking Reform) Act; secondary legislation has yet to be made.
- Under this regime the FMI administrator would be required to prioritize the continuation of services over maximizing returns to creditors; the BoE would appoint and have power of direction over the FMI administrator.

### Communication, cooperation, and information-sharing (LCH.Clearnet Ltd)
- The global importance of LCH.Clearnet Ltd warrants additional arrangements for communication, cooperation, and information-sharing with authorities not represented in the CMG, but whose jurisdictions may potentially be systemically impacted by a default of LCH.Clearnet Ltd.
- The BoE has organized the first CMG for LCH.Clearnet Ltd authorities. Membership balances efficiency and inclusiveness; not all interested authorities can participate.
- Given LCH.Clearnet Ltd’s systemic presence, it is important to give non-CMG authorities access to resolution plans and information on measures that could impact their jurisdiction.
- Clearing members of LCH.Clearnet Ltd from other jurisdictions would be exposed to the unlikely—but not impossible—failure of the CCP, and could face residual losses through loss-sharing arrangements or other recovery and resolution tools.
- Recommendation: The BoE, as the home jurisdiction of U.K. CCPs, should introduce processes for communication, cooperation, and information-sharing with jurisdictions not on the CMG but that have an interest, subject to adequate confidentiality safeguards.
- The BoE has agreed to do this for members of the LCH.Clearnet Ltd supervisory college, but should consider arrangements for other relevant authorities.

*Italics: Source text compiled from the provided IMF content unit.*

### Large-value payment system: CHAPS — structure, risks, and contingency history
- CHAPS provides real-time gross settlement for sterling transactions.
- There are currently 22 direct members of CHAPS (including the BoE and CLS Bank).
- CHAPS handles nearly all large-value same-day sterling payments between banks; a small part is settled by Bacs and FPS. Some retail transactions (e.g., house purchases) also go through CHAPS.
- Payments are irrevocable and final at the point the member’s settlement account is debited.
- Members may use balances held with the BoE on their reserve accounts to fund payments; the BoE provides collateralized intraday liquidity if members require further liquidity.
- CHAPS is operated by CHAPS Clearing Company Limited (CHAPS Co); infrastructure is provided by the BoE. CHAPS Co is member-owned, each member holding one share.

- Operational risk mitigants:
  - Second and third backup site.
  - Market Infrastructure Resiliency Service (MIRS) developed by SWIFT and implemented by the BoE in 2014 as the main contingency option for prolonged RTGS inoperability.
  - On October 20, 2014, the RTGS system suffered an outage of approximately nine hours. A decision was made not to use MIRS because problems were resolved the same day; the payment system settled all payments on the same day. The outage affected housing transactions due to be settled on that day; up to 30 percent of housing transactions may not have completed on the day.
  - Following the incident, the BoE is improving internal crisis management, contingency plans, and backups.

- Liquidity risk and mitigation:
  - Liquidity risk is the most prevalent financial risk associated with CHAPS.
  - In April 2013, the BoE introduced a Liquidity Saving Mechanism to the RTGS system for CHAPS payments.
  - The Liquidity Saving Mechanism reduced CHAPS banks’ intraday liquidity requirements by around 20 percent (or GBP 4 billion) through settling underlying payments simultaneously.
  - Simultaneous settlement (queuing) slightly increased operational risk because of a short period between submission and settlement; an interruption during this period complicates identification of whether settlement had occurred and increases the impact of switching to contingency solutions.

### Retail payment systems — Bacs, FPS, and Visa Europe
- Bacs:
  - Operated by Bacs Payment Schemes Limited.
  - U.K.’s largest retail payment system by volume, providing automated clearing house services for salary payments, credit transfers and direct debits.
  - Interbank obligations in Bacs are settled at the BoE on a multilateral net basis on day 3 of the clearing cycle.
  - Sixteen financial institutions are members, including the BoE and one building society.
  - Direct members can sponsor indirect users.

- FPS (Faster Payments Scheme Limited):
  - Near real-time system for low-value immediate payments (standing orders, internet/mobile/telephone banking transactions).
  - At present 10 financial institutions are direct members.
  - FPS allows sponsored participants to input transactions directly; direct member remains responsible for end-of-cycle settlement.
  - FPS is a multilateral deferred net settlement system with three interbank clearing cycles each working day, settling at 07:15, 13:00 and 15:45; settlement occurs across accounts held by direct members in the RTGS system at the BoE.
  - FPS is extending direct membership.

- Settlement risk elimination:
  - Bacs and FPS introduced ‘prefunding’ to eliminate settlement risk in deferred net settlement systems.
  - Members must fully cover their net obligations, before settlement, with cash held at the central bank.
  - A net cap is specified per participant to ensure exposures do not exceed prefunded amounts.
  - Prefunding covers the failure of all participants and their affiliates, not just the largest two, going beyond the PFMI recommendation.

- Operational risk management:
  - Both Bacs and FPS regularly assess supplier risks (e.g., VocaLink, RTGS settlement, U.K. Payments Administration).

- Visa Europe:
  - Recognized by HM Treasury as a systemically important payment system in March 2015.
  - Since recognition, Visa Europe is subject to supervision by the BoE.

### Governance of main U.K. FMIs (summary)
- CHAPS: Operated by CHAPS Clearing Company; infrastructure by BoE; owned by its members (22 banks in October 2015).
- Bacs: Operated by Bacs Payment Schemes Ltd; owned by its members.
- FPS: Operated by Faster Payments Schemes Ltd; owned by its members.
- Visa Europe: Owned by its members; recognized systemically important in March 2015.
- LCH.Clearnet Ltd: Owned by Paris-based LCH.Clearnet Group Ltd; LCH.Clearnet Group Ltd is majority owned by the London Stock Exchange, remainder owned by users and other exchanges; London Stock Exchange is publicly listed.
- ICE Clear Europe: Owned by Intercontinental Exchange; publicly listed company on the New York Stock Exchange.
- CME Europe: Owned by the CME Group; publicly listed company.
- LME: Owned by Hong Kong Exchanges and Clearing Ltd; publicly listed company in Hong Kong.
- EUI (Euroclear U.K. & Ireland): Owned by Euroclear SA/NV with subsidiaries; Euroclear Plc is a U.K.-registered private company owned by around 200 user-shareholders.

### CCPs: products, risk management, and liquidity arrangements
- Market coverage:
  - LCH.Clearnet Ltd: largest CCP worldwide for OTC traded IRS contracts; clears other OTC derivatives, gilt and Bund repos, and equity transactions for the London Stock Exchange.
  - ICE Clear Europe Limited: large in European corporate and sovereign CDS and exchange-traded derivatives traded on ICE Futures Europe.
  - LME Clear: clears LME traded non-ferrous metal derivatives.
  - CME Clearing Europe Limited: clears a range of OTC and exchange-traded derivatives and spot commodities contracts.

- Lines of defense against credit and liquidity losses:
  - Participation requirements: minimum financial resources, creditworthiness, and operational capacity; requirements vary by market/product.
  - Margining: initial margin and variation margin calculated on all positions with methodologies tailored to market risk characteristics (e.g., LCH.Clearnet Ltd uses SPAN for exchange-traded derivatives and proprietary models for interest rate swaps). Mark-to-market variation margin at least daily; intraday margin calls possible; margin models back tested regularly.
  - Eligible collateral: CCPs accept only high quality collateral, such as cash in a set of internationally eligible currencies or government bonds. Typically variation margin must be covered fully in cash. LCH.Clearnet Ltd accepts only cash as contributions to default funds.
  - Guarantee/default funds: clearing members obliged to make minimum contributions. ICE Clear Europe maintains two separate guarantee funds (one for futures and options; one for CDS). LCH.Clearnet Ltd holds six different default funds for different markets, segregating default resources by service.
  - Skin in the game:
    - LCH.Clearnet Ltd places a portion of its own resources equal to 25 percent of its minimum net capital held in accordance with EMIR ahead of all non-defaulting members’ contributions to mutualized default funds.
    - ICE Clear Europe committed USD 100 million as ‘skin in the game’ for its Futures and Options segment.
    - ICE Clear Europe has lined up USD 25 million ahead of all non-defaulting members’ contributions to the CDS default fund and contributed another USD 25 million to the CDS guarantee fund.
  - Default fund sizing: default funds are sized to cover at a minimum the sum of the two largest members’ stress-test losses (including affiliates and clients) in excess of margin. Stress losses are modeled daily against extreme but plausible stress scenarios; reverse stress testing examines combinations of more than two members defaulting.

- Liquidity risk management:
  - Daily stress tests to model liquidity needs.
  - LCH.Clearnet Ltd models liquidity out to 30 days to ensure sufficient liquidity for ongoing operations while withstanding default of the two participant groups that would give rise to the largest first day liquidity requirement.
  - Liquidity requirements calculated for all relevant currencies.
  - LCH.Clearnet Ltd’s primary liquid resources: cash and highly marketable securities (including those provided by a defaulted member as collateral).
  - As of June 30, 2015, LCH.Clearnet Ltd had prearranged funding arrangements with 27 counterparties, including counterparties with particular expertise and capacity in specific collateral markets.
  - LCH.Clearnet Ltd engages in reverse repurchase transactions for investment purposes and has a regular program of test repurchase (i.e. borrowing) transactions reported through the risk governance process.
  - LCH.Clearnet Ltd has prearranged funding arrangements with major international CSDs.

- Interoperability risk management (LCH.Clearnet Ltd):
  - Master Clearing Link Agreement in place with interoperable CCPs (EuroCCP and SIX x-clear); interoperable CCPs are subject to the same risk management framework as clearing members and may be called for additional margins, including concentration and liquidity margins and intra-day margins.
  - Interoperable CCPs are modeled as clearing members for daily stress testing to a Cover 2 standard for liquidity purposes and to size the default fund.
  - Collateral provided by interoperable CCPs is held via a pledge agreement with Clearstream Banking Luxembourg.
  - At least annually, LCH.Clearnet Ltd assesses interoperating CCPs’ risk profiles based on: (1) return on equity ratio; (2) external ratings; (3) initial margin/default fund ratio; (4) confidence interval of margin models; (5) whether default resources are cover 1 or cover 2; and (6) operational capability/business strategy (including membership and other risks).

### 51. CREST is important for the BoE’s monetary policy operations. The BoE uses CREST to

### _cr16156 - 51. CREST is important for the BoE’s monetary policy operations. The BoE uses CREST to

### CREST’s role in monetary policy operations and government securities
- The BoE uses CREST to receive collateral to support its monetary policy operations and provide intraday liquidity to eligible RTGS members.
- CREST acts as the U.K. Debt Management Office’s settlement agent for the issuance and management of U.K. gilts and Treasury bills in CREST.

### EUI (Euroclear UK & Ireland) structure and services
- EUI is part of the Brussels based Euroclear Group. Parent company Euroclear SA/NV provides and supports the technical CREST services for EUI.
- EUI is the U.K. regulated body; the Board of Directors of EUI is responsible for providing the CREST services to the U.K. and Irish markets.
- EUI’s International Service enables CREST members to hold and settle transactions in foreign securities through links with other CSDs.

### Settlement models and residual risks
- EUI settles sterling and euro transactions on a gross delivery versus payment basis (DVP model 1) in central bank money with simultaneous and irrevocable transfer of cash and securities.
- For U.S. dollar settlements the CREST system provides DVP model 2 settlement in commercial bank money.
- U.S. dollar transactions are settled in the CREST system during the settlement day; however, CREST settlement banks discharge their net bilateral US dollar payment obligations at the end of the day outside the CREST system.
- The resulting residual interbank credit risk accounts for 1.3 percent of EUI’s cash settlement, which is not compliant with the PFMI or the CSD Regulation.

### Settlement banks, intraday credit, and auto-collateralization
- EUI has 16 settlement banks that have to comply with access criteria set out in the CREST Rules.
- A buyer of securities will have to use a settlement bank for the settlement of its cash leg in the RTGS system.
- CREST settlement banks are contractually bound to settle debts incurred in the CREST system by their customers.
- Settlement banks provide their customers with intraday credit in the CREST system and limit their own exposure by setting up debit caps within the system; EUI itself provides no credit facilities.
- The debit cap represents the maximum debit position a settlement bank is willing to assume for a given customer and is a combination of unsecured credit and secured credit advanced in return for a charge over securities held by their customer in the CREST system.
- To increase the supply of intraday sterling liquidity available to the settlement banks, EUI and the BoE support demand-driven auto-collateralization repo arrangements whereby a purchasing CREST member may use eligible securities (mainly U.K. government securities) in the course of settlement to generate intraday sterling liquidity for its settlement bank.

### Operational risk management and business continuity
- The policy for managing operational risk is set by the board of the parent company Euroclear SA/NV.
- Systems, policies, procedures, and controls are in place to identify and manage various types of operational risk.
- The business continuity framework describes roles, responsibilities and objectives for the timely resumption of critical operations.
- Euroclear has three data centers:
  - Two nearby data centers provide real-time synchronized data mirroring.
  - The third data center is located hundreds of kilometers away from the two synchronized sites and receives asynchronously replicated data to allow for recovery in the event of a regional disaster affecting the two other data centers.

### Key statistics and operational figures (as presented)
- Residual interbank credit risk for U.S. dollar settlements: 1.3 percent of EUI’s cash settlement.
- EUI settlement banks: 16.

- Table: United Kingdom: Average Size of Initial Margin and Default Fund (GBP equivalent, millions)
  - CME Clearing Europe: Initial margin 16; Default fund 135; Total 151
  - ICE Clear Europe — Credit default swaps: Initial margin 4,492; Default fund 876; Total 5,368
  - ICE Clear Europe — Futures and options: Initial margin 17,593; Default fund 974; Total 18,567
  - LCH.Clearnet Ltd — Commodities: Initial margin 527; Default fund 147; Total 674
  - LCH.Clearnet Ltd — Equities: Initial margin 642; Default fund 185; Total 827
  - LCH.Clearnet Ltd — ForexClear: Initial margin 136; Default fund 202; Total 338
  - LCH.Clearnet Ltd — Listed Interest Rate: Initial margin 6; Default fund 16; Total 22
  - LCH.Clearnet Ltd — RepoClear: Initial margin 8,382; Default fund 793; Total 9,175
  - LCH.Clearnet Ltd — SwapClear: Initial margin 21,003; Default fund 2,577; Total 23,580
  - LMC Clear: Initial margin 5,487; Default fund 391; Total 5,878

- Table: United Kingdom: Daily Average Volume and Value of Transactions Settled by Recognized Payment Systems (2014, change 2014/2013, Value 2014 GBP equivalent, mln, change 2014/2013)
  - Bacs — Currency: Sterling; Volume 23,087,866; Change 3; Value 17,473; Change 5
  - CHAPS — Currency: Sterling; Volume 144,352; Change 4; Value 268,615; Change -3
  - CLS — Currency: All currencies; Volume 790,346; Change 0; Value 3,101,570; Change -3
  - CLS — Currency: Sterling; Volume 56,521; Change 6; Value 236,564; Change -3
  - EUI — Currency: Sterling; Volume 181,329; Change 1; Value 675,678; Change -18
  - EUI — Currency: US dollar; Volume 5,244; Change 31; Value 1,356; Change 38
  - EUI — Currency: Euro; Volume 4,139; Change 14; Value 650; Change 15
  - EUI — Total: Volume 190,712; Change 1; Value 677,684; Change -18
  - FPS — Currency: Sterling; Volume 4,351,502; Change 14; Value 3,572; Change 17

### Legislative and supervisory context (selected points)
- Euroclear SA/NV sets operational risk policy for EUI as parent company.
- The text notes non-compliance of the 1.3 percent residual U.S. dollar settlement exposure with the PFMI and the CSD Regulation.

*Source: _cr16156 - 51. CREST is important for the BoE’s monetary policy operations. The BoE uses CREST to*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16156.pdf_