Assessment of LCH Limited's SwapClear Service 1. Regulatory Environment

LCH Ltd is a UK-based CCP licensed to operate its SwapClear service in Australia under section 824B(2) of the Corporations Act 2001, which provides licensing for an overseas-based clearing and settlement (CS) facility subject to requirements and supervision in its home country that are considered sufficiently equivalent to those in Australia.

The Bank of England (BoE) is LCH Ltd's primary supervisor in the UK, where LCH Ltd is a ‘recognised central counterparty’ under the UK Financial Services and Markets Act 2000. The BoE takes a risk-based approach to oversight, prioritising its supervisory efforts in areas where it considers risks to financial stability are greatest, with a current focus on the operational and financial resilience of LCH Ltd. Assessments of LCH Ltd are conducted at least annually, and the BoE sets supervisory priorities outlining its expectations of any risk-mitigating actions LCH Ltd should take. The BoE also conducts thematic reviews across all CCPs for which it has oversight responsibility. The Bank generally defers to the BoE on issues the BoE has identified as priorities.

Following the conclusion of the UK transition period on 31 December 2020, the BoE is now overseeing CCPs under the UK's ‘onshored’ version of the European Market Infrastructure Regulation (EMIR) (see also section 3.1 – Brexit). The core regulatory standards and supervisory powers of the BoE have not changed and the BoE continues to hold LCH Ltd to the same high regulatory and supervisory standards it had in place prior to the end of the transition period.

The Bank has a memorandum of understanding in place with the BoE regarding the supervision of CS facilities.^[1] The memorandum provides a framework for bilateral cooperation, including information sharing and investigative assistance. The Bank also engages with the BoE on supervisory matters through the LCH Ltd Global College and Crisis Management Group.

In Australia, LCH Ltd's SwapClear service is considered systemically important, clearing around 90 per cent of the notional value of the cleared AUD OTC IRD market, and is subject to an ongoing assessment against the relevant Financial Stability Standards for Central Counterparties (CCP Standards) over a rolling four-year period. This work complements the work carried out by the BoE as LCH Ltd's primary regulator. In addition to tracking progress against our regulatory priorities and areas of supervisory focus, staff completed a review of LCH Ltd against six CCP Standards during the current assessment period: collateral (CCP Standard 5), liquidity (CCP Standard 7), general business risk (CCP Standard 14), custody and investment risks (CCP Standard 15), disclosure (CCP Standard 20) and regulatory reporting (CCP Standard 21). These detailed compliance assessments are not published.

Endnotes

The memorandum is available at <http://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/pdf/memorandum-2015-05-25.pdf>. [1]