Bank of England proposes letters of credit for clearing clients’ initial margin

The Bank of England proposed on 15 October allowing uncollateralised bank letters of credit as initial margin from non-financial counterparties, including clients clearing through brokers. It covers UK clearing houses and recognised overseas CCPs considered systemically important, or likely to become so, to UK financial stability. The change could reduce clients’ cash commitments for hedging.[1]

The current framework restricts commercial-bank guarantees to non-financial clearing members and requires full collateral backing. The Bank says no UK-based clearing house currently accepts them. It proposes extending access to clients and removing that backing requirement; variation-margin practice would remain unchanged.[1]

The clearing broker remains part of the funding chain

The draft permits a letter of credit to name the clearing house alone, or both it and the clearing member as beneficiaries. In the joint arrangement, the broker would need the clearing house’s consent before drawing on the instrument. That restriction protects the guarantee available to the clearing house when its member fails.[2]

Eligible issuers would be authorised UK or overseas credit institutions. Clearing houses would assess their creditworthiness, monitor changes and validate each instrument’s authenticity with the issuer. The guarantee would have to be irrevocable, unconditional and payable on demand within the relevant liquidation period.[2]

A proposed concentration limit would cap letters of credit from one issuing bank or group at 5% of the clearing house’s total collateral. The draft also removes the existing option for a higher limit where bank guarantees dominate the collateral pool.[2]

These terms make the issuing bank’s creditworthiness and payment access central to the arrangement. A clearing broker’s client contracts would need to align the letter’s beneficiaries and drawdown rights with its obligations to the clearing house.[2]

Consultation closes on 15 January 2027. The Bank targets final policy in the first half of 2027, with commencement dependent on the UK CCP Rulebook. Clearing houses would choose whether to offer the facility, subject to Bank approval.[1]

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