Bank of England consults on fundamental rules for UK FMIs

The Bank of England (the Bank) published 10 fundamental rules (FRs) for financial market infrastructures (FMIs) for consultation on 19 November 2024. The FRs establish the Bank’s overall requirements for FMIs, and are intended to complement the existing underlying regulatory frameworks.

What does this mean?

The Financial Services and Markets Act 2023 gave the Bank rule-making powers in relation to central counterparties (CCPs) and central securities depositories (CSDs), and a secondary objective to facilitate innovation in the provision of CCP and CSD services subject to advancing its primary financial stability objective.

The Bank highlights the critical importance of FMIs to the financial stability of the UK and their crucial role in global financial markets. The Bank describes the FRs as a further tool to protect against market failures, as well as potential regulatory underlap.

Who do the FRs apply to?

The Bank supervises a range of FMIs such as CCPs, CSDs and recognised payment system operators (RPSOs). The Bank also supervises certain specified service providers (SSPs) to RPSOs.

The FRs apply to recognised UK CCPs, recognised UK CSDs, UK RPSOs and UK SSPs. The way the FRs apply differs depending on the type of FMI, as set out in the table below. Third country CSDs, systemic third-country CCPs, non-UK RPSOs and non-UK SSPs are out of scope.

Table 1: application of the FRs to in-scope FMIs
	CCPs	CSDs	RPSOs	SSPs
Individual FMIs	The 10 FRs apply to all FMIs in scope of the rules on an individual basis.
Regulated vs unregulated activities	The FRs apply to regulated and unregulated activities.		The FRs apply to regulated activities only.
Group activities	FRs 3 - 10 apply to group activities.		The FRs do not apply to group activities
Extraterritorial activities	The FRs apply extraterritorially to all regulated and unregulated activities.		The FRs apply extraterritorially to all regulated activities.

What are the FRs?
FR 1	An FMI must conduct its business with integrity.
FR 2	An FMI must conduct its business with due skill, care and diligence.
FR 3	An FMI must act in a prudent manner.
FR 4	An FMI must maintain sufficient financial resources.
FR 5	An FMI must have effective risk strategies and risk management systems.
FR 6	An FMI must organise and control its affairs responsibly and effectively.
FR 7	An FMI must deal with its regulators in an open and co-operative way and must disclose to the Bank appropriately anything relating to the FMI of which the Bank would reasonably expect notice.
FR 8	An FMI must prepare for resolution or administration so, if the need arises, it can be resolved or placed into administration in an orderly manner with a minimum disruption to critical services.
FR 9	An FMI must maintain sufficient operational resilience
FR10	An FMI must identify, assess, and manage the risks that its operations could pose to the stability of the financial system.

The CP provides some further guidance on the Bank’s objectives and expectations for each of the FRs, including:

Financial resources (FR 4): The Bank highlights that FMIs will need to take account of their wider group-level financial resource needs when ensuring they maintain sufficient financial resources.
Risk strategies and management systems (FR 5): The Bank will expect FMIs to have a clearly defined risk appetite. A vaguely expressed risk appetite could be a breach of this FR.
Cooperation with regulators (FR 7): This FR is aimed at mitigating the risk that FMIs do not share information that could have a material impact on FMIs’ resilience or UK financial stability. The FR extends to notifying the Bank about events concerning FMIs’ non-regulated activities and the activities of its wider group, where applicable.
Operational resilience (FR 9): The Bank notes that this FR is consistent with existing regulatory obligations, including the requirements set out in the Principles for Financial Market Infrastructures, UK EMIR, UK CSDR and the Bank’s Supervisory Statement on Operational Resilience for CCPs and CSDs.

Managing risks that could have a financial stability impact (FR 10): This FR requires FMIs to consider the impact of their operations on the broader market. The Bank’s expectation is that FMIs’ behaviours should take account of, and reflect, their systemic importance and ability to have an impact on the stability and confidence of the financial system. The Bank provides some illustrative examples of how FMIs could consider this FR in different scenarios including operational outage by a third-party provider.

The Bank’s updated approach to FMI supervision document contains a revised risk model for supervising FMIs. The model more explicitly identifies operational resilience and ‘preparedness for disruption’ as mitigating factors.

The document also includes an expanded section on the Bank’s approach to supervising non-UK FMIs, which it states is consistent with international standards. The Bank notes its approach is underpinned by the concepts of deference to, and coordination with, non-UK FMIs’ home regulators.

What do firms need to do?

Undertake impact assessments and gap analysis of existing compliance with the regulatory frameworks that will underpin the FRs.

Consider how information on risks and notifiable events is identified, collected and shared across group businesses, and with regulators.

Explore whether technology-enabled solutions could be used to support consideration of a wider set of risks to comply with the FRs.

The Bank highlights that where FMIs are compliant with the regulatory frameworks that will underpin the FRs, they can expect to be compliant with the new rules. Nevertheless, FMIs in scope of the FRs should begin preparing for their implementation. Steps FMIs should take include:

1. Undertake impact assessments and gap analysis of existing compliance with the regulatory frameworks that will underpin the FRs.

FMIs may need to update their current internal policies and processes to ensure they can comply with the new FRs, and remain compliant with all other existing regulatory obligations.

2. Consider how information on risks and notifiable events is identified, collected and shared across group businesses, and with regulators, and consider process enhancements if needed.

As the Bank notes, what constitutes ‘reasonable’ in terms of the FR 7 requirement to notify the Bank of relevant information and events will vary depending on the circumstances facing the FMI, and the extent to which group and unregulated activities are captured by the FRs.

3. Explore whether technology-enabled solutions could be used to support consideration of a wider set of risks to comply with the FRs.

The FRs will require FMIs to holistically consider a wider set of risks, and develop clearly defined risk appetites across a range of functions. Technology-enabled solutions may be useful in helping FMIs to identify and track risks, and support reporting and accountability processes.