As with banks, the regulator intends to be judgmental and forward looking, not just checking the rules are followed but also that the setup is right for that given body.
Institutions like central counterparties (CCPs) and securities settlements systems fall under the banner of financial market infrastructures (FMIs), the plumbing of the City which the Bank of England will monitor from next year.
Banks have been warned that competing too aggressively may lead to other banks following suit, cutting interest rates and lowering lending criteria, which could hurt stability.
The Bank of England yesterday warned CCPs against doing the same.
“Given that competitive incentives may result in pressure to lower margin requirements, the Bank will carefully supervise where and how discretion is used in the modelling and assessment of risks, and in choices on how to mitigate that risk,” it said.
This could mean sending in external experts to monitor the process.
The regulator also said the supervisory regime would be an active one.
“The Bank intends to perform spot checks on particular aspects of an FMI’s rules or operations, directly or via external experts, either by requesting evidence or by on-site examination, pre-announced or otherwise.”