UK regulatory priorities for financial market infrastructure

The Bank of England's (BoE) 2022 supervisory priorities for financial market infrastructure continue to focus on financial and operational resilience and international cooperation. HM Treasury's (HMT) proposed changes to the BoE's regulatory powers over central counterparties (CCPs) and central securities depositories (CSDs) will formalise this focus but also require the BoE to facilitate innovation in the sector.

The BoE supervises UK FMIs - payment systems, CSDs and CCPs. Its current supervisory objective is to protect and enhance the UK's financial stability, and its annual report on the supervision of FMI's sets out key changes in three areas:

• supervision of FMIs and targeted enhancements to the supervisory frameworks
• continuing innovation in payments 
• new supervisory powers for non-UK FMIs following the UK's withdrawal from the EU

The importance of financial market infrastructure continues to grow as trading in financial markets becomes more complex and interconnected. Mergers and acquisitions are leading to more consolidation and concentration of service providers. Regulators are increasing their oversight and focus on FMIs, concerned that FMIs themselves could cause risks to financial stability and market integrity.

Therefore, the BoE's future priorities for FMIs replicate some of the existing initiatives that aim to bring financial & operational stability to the banking sector.

In particular, the BoE will:

• Review implementation of new operational resilience standards coming into force from April 2022 to identify areas for greater focus and improvement
• Focus on the role of third-parties in the provision of critical services by FMIs — with particular focus on interdependencies and operational resilience - and consult on FMI outsourcing (specifically on the use of cloud). This will build on the expectations that the BoE set out in its September 2021 letters to CSDs, CCPs and payment systems operators on material outsourcing to the public cloud
• Establish a Senior Managers and Certification Regime (SMCR) for FMIs to help ensure that individuals in key positions of influence within FMIs are fit and proper, and accountable. The BoE and HMT are considering the responses to HMT's July consultation on SMCR for FMIs. The Government intends to legislate for this new regime when parliamentary time allows
• Promote diversity and inclusion in the FMI sector to support good risk management, better decision-making and greater innovation. The BoE will consider responses to the BoE/FCA/PRA discussion paper and voluntary diversity data survey of FMIs as it develops it proposals to enhance diversity and inclusion
• Conclude its first supervisory stress test of UK CCPs and further develop its CCP supervisory stress testing framework
• Continue to keep the scope of the clearing obligation under review, including by monitoring developments in LIBOR benchmark transition in the USD interest rate derivatives markets

The BoE emphasises that international co-operation is a fundamental component of its supervisory approach given the cross-border nature of FMIs. It will continue to support the following international workstreams: 

• An international workstream formed jointly under the Basel Committee on Banking Supervision (BCBS), Committee on Payments & Market Infrastructure (CPMI) and IOSCO to review margining practices during the early stage of the pandemic — BoE is co-chair
• Financial Stability Board (FSB)-CPMI-IOSCO work on CCP financial resources
• Monitoring the implementation of principles for financial market infrastructure (PFMI)
• Climate change-related risks to FMIs

The BoE aims to ensure that payment infrastructure is designed and implemented in a way that promotes the resilience of individual FMIs and the broader financial system. Its priorities for 2022 include:

• Continuing to work with HMT and other authorities to develop the UK approach to crypto-assets and stablecoins (following publication of the discussion paper on new forms of digital money)
• Monitoring the development of the UK's New Payment Architecture programme which will replace the current Faster Payments Scheme and, in due course, the BACS system 
• Collaborating on the FSB's cross-border payments roadmap
• Continuing to help shape the international regulatory response to stablecoins

The BoE also welcomes HMT's commitment (in the response to the Payments Landscape Review call for evidence) to consult in H1 2022 on expanding the BoE's regulatory remit to capture a wider range of systemic payment firms.

With the exit of the UK from the EU, the BoE has taken on a number of FMI-related powers and responsibilities formerly exercised by EU authorities. It has started setting out its approach to some of these responsibilities with its consultation on the recognition and `tiering' of non-UK CCPs and plans to consult soon on its approach to oversight of non-UK CSDs.

However, the BoE has very limited powers to set direct regulatory requirements on these firms as these requirements sit in retained EU law, such as UK European Markets Infrastructure Regulation (EMIR), that were on-shored when the UK left the EU. Updates or changes to these regulatory requirements have to be made by Government and Parliament.

HMT is consulting on granting the BoE a general rule-making power over CCPs and CSDs. This would allow more agile and responsive rule-setting, making full use of the BoE's experience and knowledge gained from supervising CCPs and CSDs. This follows the model that HMT is proposing for the whole sector as part of its Future Regulatory Framework Review, with expert, independent regulators overseeing regulatory standards within an overall policy framework set by Government and Parliament.

The policy framework for CSDs and CCPs will consist of the existing primary objective of achieving financial stability. However, given that UK CCPs and CSDs are used by firms in many other jurisdictions, HMT is considering whether, when exercising its rule making powers, the BoE should also consider the financial stability impact of UK CCPs and CSDs on other jurisdictions. HMT is also considering whether it should be explicit that the BoE must have regard to ensuring that its regulation is based on financial stability risks and not on the basis of nationality or location of users of CCP and CSD services.

HMT is also considering specifying a secondary objective for the BoE that, as it advances its primary objective for financial stability, it must, so far as is reasonably possible, facilitate innovation in the clearing and settlement services provided by the CCPs and CSDs. This is with a view to improving the quality, efficiency and economy of the services they provide.