HANSARD
Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023
- Considered in Grand Committee
- 4:27 pm
- Moved by
- That the Grand Committee do consider the Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023.
- My Lords, these draft regulations make necessary technical and consequential legislative changes and provide legal protection for contractual arrangements to ensure that the expanded resolution regime for central counterparties, or CCPs, operates as intended.Resolution is the framework for managing the failure of certain financial institutions. Within this framework, the Bank of England is the UK’s resolution authority and leads on resolution processes once instigated. The UK’s current resolution regime for banks and building societies was introduced in 2009, and this was partially extended to CCPs in 2014. A new, bespoke and expanded regime for CCPs was created this year through Schedule 11 to the Financial Services and Markets Act 2023.CCPs are firms that provide clearing services for large volumes of financial trading activity. They sit between buyers and sellers and guarantee the terms of the trade. They are systemically important pieces of market infrastructure—without them, the financial system cannot function effectively. The failure of a CCP and the resulting loss of its clearing services could lead to serious consequences for financial markets, financial stability and public funds. The UK’s expanded CCP resolution regime will enhance the Bank of England’s resolution powers and ensure that the UK is aligned with international standards on CCP resolution. To fully implement the expanded CCP resolution regime, the Government must lay a number of statutory instruments. Two of these are being debated by your Lordships’ House today.The first set of regulations, the Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations, make the necessary changes to existing legislation to ensure that the expanded CCP resolution regime can function as intended. These modifications have two main parts. The regulations will ensure that resolution powers under Schedule 11 will continue to be treated in a similar way to the existing CCP resolution regime in the Banking Act 2009. This largely consists of mirroring changes made under the Banking Act to the Companies Acts 1989 and 2006.
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- Secondly, the regulations make wider consequential amendments to broadly ensure that the consequences for CCPs of the use of resolution tools are consistent across the existing and expanded regimes, and that the Bank of England can continue to use its powers in a similar way to now. For example, the regulations ensure that corporation tax and stamp duty are applied and disapplied in the same way under the expanded regime as under the existing regime. They also disapply shareholders’ rights to call general meetings and amend the articles of association of the company in a resolution, and allow for appropriate disclosure of confidential information in a resolution. All this underpins the Bank of England’s ability to act quickly and effectively when resolving a CCP.
- On the second set of regulations—the Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Partial Property Transfers and Safeguarding of Protected Arrangements) Regulations—Schedule 11 gives the Bank of England the power to make partial property transfer and write-down instruments when resolving a CCP. These regulations ensure that these instruments do not affect protected arrangements that underpin the effective operation of financial markets, including set-off and netting arrangements.
- Netting is one of the mechanisms through which a CCP reduces risk in financial markets. Multiple financial obligations are aggregated to create a single net obligation amount. Given the importance of this function to the operation of clearing services, these safeguarding regulations ensure that set-off and netting arrangements are protected when the Bank of England uses its property transfer powers. This is particularly relevant for partial property transfers, where the Bank of England can transfer all or some of the rights and liabilities of a CCP. For example, the regulations provide that the property or rights against which a liability is secured cannot be transferred unless the liability is also transferred. This ensures that these arrangements are maintained throughout a resolution, reassuring industry and minimising wider impacts on financial markets. The Bank of England also has the power to write down liabilities, meaning it can cancel, modify or change a security or the form of an unsecured liability owed to the CCP.
- In summary, the regulations ensure that usual market practice continues and disruption to financial markets is minimised when the Bank of England takes action, while also providing certainty for market participants as to how they will be treated during any resolution proceeding. Together, these regulations ensure that a resolution can be conducted as effectively as possible, while reducing the impact on normal market functions.
- In addition to the regulations I have outlined which are being debated by your Lordships’ Committee today, the Government have also laid before Parliament two statutory instruments subject to the negative procedure that are required when the new regime comes into force. The first set of these regulations relates to the use of cash-call powers. These regulations set out the maximum amounts of cash the Bank of England can require clearing members to pay through a cash-call instrument. The second set of regulations sets out the process by which the Bank of England can waive, suspend, or subsequently enforce a provision it has made in a resolution instrument. If all the SIs relating to the regime pass through Parliament, the expanded resolution regime will come into force on 31 December.
- The Government have worked closely with the financial services industry in preparing this package of legislation and consulted on the expansion of the CCP resolution regime in 2021. Those engaging with the consultation and in industry engagement sessions were broadly supportive of the proposed framework. The Treasury is also advised by a CCP Resolution Liaison Panel, which comprises industry and regulator stakeholders. The panel was instituted earlier this year and was consulted on the substance of these statutory instruments.
- In summary, these regulations will help ensure that there is a robust resolution regime in place for CCPs, protecting public funds and the financial stability of the United Kingdom. I beg to move.
- My Lords, when the original legislation that sits behind all this was debated in the House—for many hours—I remember a conversation afterwards with one of the clerks, who had sat through nearly all of the proceedings. The clerk said to me, “I have sat in this House for years and have been through many debates of all kinds, but this is the first time I have sat through a debate and not understood a single word of the entire discussion”. I am feeling some brotherhood with that clerk at the moment. I remember the past, but I have to admit that I still find utterly daunting the complexity of CCPs and the various pieces of legislation.I have been digging through my memory and am trying to understand whether these SIs are essentially tidying-up measures designed to give more flexibility to the Bank of England—in its role as the resolution authority—in somewhat changed circumstances, and measures to increase its efficiency. I ask the Minister: is there anything in here to which she would draw our attention as representing a more fundamental change? I admit that I cannot find it, but I thought I should ask the question, given the narrowness of my understanding of this complexity.As I remember, the resolution of the insolvency of a CCP was structured using a waterfall of liability. First, equity and the CCP came into use, and, after that, if necessary, so did a default fund, to which the clearing members had contributed. My colleague, my noble friend Lord Sharkey, and I pushed on this question, because it seemed apparent to us that the combination of equity and a default fund could work if, say, one clearing member collapsed, or perhaps even two. But, if the collapse were systemic, very quickly only the taxpayer would have the resource to step in. The taxpayer would need to do so immediately to prevent chaos in the financial sector nationally and, probably, globally. The Minister will be aware that virtually all CCPs around the globe essentially have common ownership and, in many ways, need to be looked at almost as a network, rather than a series of individual operations—certainly when one thinks about resolution.
- My Lords, I begin by warmly welcoming the Minister to her new role. I very much look forward to working with her in the months ahead.
- May I offer my apologies for not having welcomed the Minister to her role? We talk to each other across the House so often that I hardly realised a change had happened; I apologise.
- As the Explanatory Memoranda accompanying these two SIs note, the current CCP regime was implemented around a decade ago, in part as a response to the global financial crisis. The Financial Services and Markets Act 2023 has introduced an expanded CCP resolution regime, with that Act giving the Bank of England, as the UK’s resolution authority, what the Government call“an expanded toolkit to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds.”Preserving market stability is of paramount importance. The UK’s financial services industry plays a vital role in boosting economic growth and delivering skilled jobs in every part of the UK. Almost 2.5 million people are employed in financial services, with two-thirds of those jobs based outside London, and the sector contributes more than £170 billion a year to GDP.The City of London is one of only two global financial capitals and is at the very heart of the international monetary system. The UK’s reputation and success as a leading international financial centre depends on high standards of regulation as well as a stable and independent regulatory regime. Much of what is being implemented by these two SIs is a carryover between the old and new CCP regimes. Paragraph 3 of the impact assessment outlines that, if these steps were not taken, it“would mean that there is no protection in place to ensure that the Bank’s powers do not disrupt normal market procedure.”We therefore fully support both these SIs.However, I want to ask the Minister a number of questions. First, an issue frequently raised with this type of SI is the sheer breadth of legislation that it tends to amend and the difficulty that those in the sector may face in familiarising themselves with all the changes once they have taken effect. The first of the SIs we are debating today makes a long list of changes to corporate law to ensure that the new Schedule 11 CCP regime will function effectively. The second SI somehow manages to be even more technical; it deals with partial property transfers and the writing down of liabilities, needed to ensure that they do not disrupt the new system’s operation. I ask the Minister, therefore, how interested parties will be, or have been, notified of the contents of these instruments, and when the guidance referenced in paragraph 11.1 of both Explanatory Memoranda will be laid. Will that guidance be laid before Parliament, or at least sent to the relevant parliamentary committees?
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- Secondly, both Explanatory Memoranda note that a consultation on the expanded CCP regime ran in early 2021, with 14 written responses received. The impact assessments cite figures from the Futures Industry Association that point to 215 clearing members. Fourteen respondents out of 215 members feels like a very small number, even for something so specialised. Is the Minister satisfied that the consultation was sufficiently thorough? The Explanatory Memorandum goes on to state that these responses fed into the policy ultimately contained in the Financial Services and Markets Act 2023, but there is no real explanation of the process. Could the Minister elaborate on how responses to the consultation were taken into account?
- Finally, given that the consultation took place back in 2021, why were the changes we are debating not included in the Financial Services and Markets Act itself, rather than coming now in the form of SIs after Royal Assent? I thank the Minister in advance for her answers to the questions I have raised.