BoE recognises CCPs as TBTF

The Bank of England yesterday announced that it is widening access to its Sterling Monetary Framework to include broker-dealers and CCPs.

“Specifically, from today, those broker-dealers deemed critical to the stability of the UK financial system (designated investment firms) and CCPs that operate in UK markets and are either authorised under EMIR or recognised by ESMA, are eligible to apply for participation in the SMF, including the Discount Window Facility”

This is a welcome move by the BoE, there is little doubt that CCPs in particular represent points of potential systemic risk; provision of  a central liquidity backstop is an implicit recognition of their TBTF status and will go some way to answering (at least for the UK) the belated chorus of criticism aimed at CCP capital provisions. The Bank’s liquidity insurance facilities comprise three distinct operations: the monthly Indexed Long Term Repo , the Discount Window Facility and the Contingent Term Repo Facility. All these, as well as the Short-Term repo Facility are being made available to systemically-significant broker-dealers; in contrast, the CCPs will only be able to access the Discount Window facility. Accessed on a bilateral on-demand basis, the DWF aims to diffuse the effect of a firm-specific or market-wide liquidity shock. Participants may borrow HQLA in return for less liquid collateral in large size and for as long as adverse conditions persist.

The move is CCP-specific and does not constitute the first step in enabling the CCPs to establish repo facilities deep enough to transform pension funds’ bond holdings to cash collateral. However, the Bank should be congratulated on at least putting a loincloth on the naked CCP emperor.

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