On October 4, ISDA and FIA submitted a joint response to two Bank of England (BoE) consultations on central counterparty (CCP) recovery and resolution (R&R):

• the BoE’s power to direct a CCP to address impediments to resolvability (available here); and
• the BoE’s approach to determining commercially reasonable payments for contracts subject to a statutory tear up in CCP resolution (available here).

In response to the BoE’s consultation on its power to direct a CCP to address impediments to resolvability, ISDA and FIA welcome the clarity provided by the BoE on the timescales it would follow when using its power to address impediments to resolvability. However, the response also notes that the BoE should more explicitly set out whether and how it would consider informing clearing members ahead of using this power. The associations would welcome some form of publication of the BoE’s resolvability assessments of UK CCPs, similar to what the BoE currently does with resolvability assessments of UK banks.

In response to the BoE’s consultation on its approach to determining commercially reasonable payments for contracts subject to statutory tear-up in CCP resolution, the associations expressed caution on the proposed approach, which could result in placing too much reliance on the CCP’s own rules and arrangements to generate commercially reasonable prices for contracts subject to tear up. The response highlights that in a situation where the BoE would have to use its power to tear up contracts – ie, after a failed auction – there might not be a clear price for those contracts. The associations suggest that the BoE should consider the circumstances that led the auction to fail, as these factors could significantly influence whether the prices generated by the CCP are appropriate. The associations also stressed that when assessing whether prices are commercially reasonable, the BoE should ensure the proposed prices do not result in the allocation of losses to some market participants.