The Bank of England is consulting on allowing clearing houses to accept commercial-bank letters of credit without requiring them to be fully backed by collateral. The proposal could broaden non-financial firms’ options for initial margin while tightening exposure limits on any single issuing bank. Responses are due by January 15, 2027, and acceptance would still depend on clearing-house rules.
The Bank of England, the UK’s central bank, opened a consultation on October 15 on allowing clearing houses to accept commercial-bank letters of credit without full collateral backing. These instruments give a beneficiary the right to demand cash from the issuing bank up to a specified amount. Clearing houses choosing to accept them would need the Bank’s permission and additional risk controls. Responses are due by January 15, 2027.[1], [2]
Initial margin covers losses that could arise after a clearing member defaults and before its positions are closed or hedged. The proposal would extend letter-of-credit access to non-financial companies participating as clients, alongside direct clearing members. No UK-based clearing house currently accepts commercial-bank guarantees as collateral. The Bank says a fully cash-backed guarantee requires firms both to set aside cash and to pay guarantee fees.[1]
The proposed limit for instruments issued by one bank would fall from 10 per cent to 5 per cent of total collateral. Clearing houses would continuously monitor issuing banks’ creditworthiness and test defaults or payment delays. Letters would remain unconditional, irrevocable and payable on demand. Daily changes in positions would continue to be covered by cash variation margin. Each clearing house would retain its own rules on which eligible collateral it accepts.[1]
