On 15 October 2026, the Bank of England (BoE) published a consultation paper (CP) seeking views on its proposals for updated rules that would permit central counterparties (CCPs) to accept uncollateralised letters of credit (LOCs) as collateral as well as the risk mitigants that CCPs would be required to implement if they chose to accept this type of collateral.
Background
In June 2025, the BoE consulted on the draft UK CCP Rulebook as part of the repeal and replacement of the UK European Market Infrastructure Regulation (UK EMIR) with BoE rules. The BoE expects to publish its policy response and rules in Q4 2026. These rules will come into effect once HM Treasury (HMT) repeals Titles III to V of UK EMIR and the associated technical standards. From that point, the relevant CCP-facing requirements currently set out in UK EMIR will be replaced with BoE rules and they will no longer form part of the regulatory framework for CCPs.
This CP sets out policy proposals to update the CCP collateral framework to permit the acceptance of LOCs as collateral in the UK centrally cleared markets. This consultation is focused on commercial bank guarantees and does not propose changes to the acceptance of guarantees backed by central banks.
Summary
The BoE is proposing to make the following changes:
- Terminology and LOC models: The BoE proposes replacing references to commercial bank guarantees with commercial bank LOCs in the UK CCP Rulebook. Feedback indicated that LOCs are the term more commonly used in practice and are not necessarily interchangeable with bank guarantees. LOCs are generally unconditional, irrevocable and payable on demand, with established international standards supporting operational consistency and legal certainty. The BoE does not propose a standard LOC template, instead expecting CCPs to develop robust contractual documentation. The BoE identifies the following main approaches:
- Standby model: A clearing member obtains an LOC from a bank and posts it directly to the CCP. If the member defaults, the CCP redeems the LOC.
- Standby model with collateral transformation: A client posts an LOC to a clearing member, which transforms it into eligible collateral before posting it to the CCP. This model is already possible under the existing framework.
- Pass-through model: A client’s LOC is passed through the clearing member to the CCP. Depending on the default scenario, either the clearing member or CCP may draw on the LOC.
- Market Participants Who Are Eligible to Post LOCs: Currently, only non-financial counterparties (NFCs) that are clearing members may provide bank guarantees. The BoE proposes allowing NFC clients to post LOCs, enabling wider use of pass-through models and supporting central clearing for hedging purposes.
- Collateralisation: The BoE proposes removing the requirement that LOCs be fully collateralised. It considers the current requirement economically unattractive and notes that no UK CCP currently accepts bank guarantees as collateral.
- Risk Mitigants: To support the use of uncollateralised LOCs, the BoE proposes safeguards, including:
- Eligible Issuers of LOCs: LOCs should be issued only by authorised UK or authorised overseas credit institutions, with CCPs required to monitor issuers’ creditworthiness on an ongoing basis.
- Concentration Limits and Stress Testing: The BoE proposes reducing concentration limits from 10% to 5% of total CCP collateral, removing the current 25% exception, and requiring CCP stress testing to reflect LOC-related risks.
- Legal Safeguards: Existing requirements for LOCs to be irrevocable, unconditional and payable on demand would remain. CCPs would also need to verify LOC authenticity, while clearing members could only draw on jointly-beneficial LOCs with CCP consent. The BoE is also seeking views on omnibus accounts, porting arrangements and any residual risks.
Next steps
The BoE has asked for feedback on this CP by 15 January 2027. The BoE has also stated that it intends the final rules will be published in H1 2027.
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