LCH.Clearnet says the Bank of England has become the “concentration bank” for Sterling and Euro payments. In other words, Sterling and Euro cash flows and margin collected from members’ bankers through the Protected Payments System (PPS), will now be concentrated at the Bank of England. The sums involved, which vary daily, average approximately £1 billion each working day.
A report compiled by the Bank of England and the Financial Services Authority in 2001 following an earlier report by the Committee on Payment Settlement Systems (CPSS) recommended the move to central bank accounts. LCH.Clearnet says the change is a further step in the harmonisation of business practices within the LCH.Clearnet Group as LCH.Clearnet SA already operates on this basis.
The Payment Systems Oversight Report 2004, published by the Bank of England, highlighted the critical role that LCH.Clearnet Ltd’s concentration banks play in the operation of the PPS, and therefore in the functioning of LCH.Clearnet Ltd as a central counterparty. The transfer of the role of concentration bank to the Bank of England effectively eliminates any possibility of commercial credit risk on funds held at the concentration bank in these currencies.
“The move to the Bank of England follows international recommendations, and removes an element of residual counterparty risk,” says Andrew Lamb, Chief Executive at LCH.Clearnet Ltd. “We are particularly grateful to our previous sterling and euro concentration bankers for their work over the years and look forward to working with them in other areas.”
Currently, LCH.Clearnet cash settlement and margin payments are made through its Protected Payments System (PPS), which consists of a number of settlement banks that make and receive payments on behalf of members. At the centre of the PPS system are concentration banks – one for sterling and euro, one for US dollars, and one for other currencies – which are used to pool together all payments from the other PPS banks, before investing surplus cash (after payments to members) in the money markets.