The Bank of England has proposed allowing central counterparties (CCPs) to accept uncollateralised commercial bank letters of credit as initial margin from non-financial clearing members and clients. The optional framework is intended to reduce firms’ reliance on cash and support continued hedging during market stress. It would apply to UK CCPs and recognised non-UK CCPs considered systemically important to UK financial stability, while excluding variation margin and central bank guarantees. Letters of credit would have to be issued by authorised UK or overseas credit institutions, remain irrevocable, unconditional and payable on demand, and satisfy authenticity and validity checks. CCPs would have to monitor issuers’ creditworthiness, include issuer failures and delayed drawdowns in stress testing, and assess continued compliance with the Cover 2 requirement. Exposure to any single issuing bank would be capped at 5% of the CCP’s total collateral, down from 10%, and the option to raise the limit to 25% would be removed. Where a clearing member and CCP are joint beneficiaries, the clearing member could draw on the letter of credit only with the CCP’s prior consent. CCPs would retain discretion over whether to accept letters of credit and would need the Bank’s permission before doing so. The Bank proposes publishing final rules in the first half of 2027, with no implementation period and commencement no earlier than the UK CCP Rulebook takes effect.
Bank of England consults on allowing CCPs to accept uncollateralised letters of credit for initial margin, with 5% single issuer cap
The Bank of England has proposed allowing CCPs to accept uncollateralised letters of credit from non-financial clearing members and clients as initial margin. Safeguards include authorised bank issuers, ongoing credit monitoring, stress testing and a 5% cap on total collateral from any single issuer. Acceptance would be optional and subject to the Bank’s permission.