Resilience tops Bank of England’s priority list for FMIs

Operational resilience of the UK’s financial infrastructure will be a key focus of the Bank of England, as the March 31 deadline looms for firms to demonstrate their impact tolerances for critical services disruption.

Financial market infrastructures (FMIs) played a crucial role in managing risk for the financial sector, according to Sasha Mills, executive director at the Bank of England speaking at a round table this morning . But they also centralised risk, she warned, adding that “disruption or operational outages at an FMI can trigger severe financial instability and economic consequences”. These could damage confidence in the UK’s financial system, and FMI operational resilience was all the more critical at a time of mounting geopolitical risk, Mills said.

The incident last summer when an update at cybersecurity group Crowdstrike caused widespread disruption to firms in a number of industries — including train and airport operators — demonstrated the importance of the regulator’s focus on third-party suppliers and outsourcing arrangements, Mills noted.

Firms have been participating in war games and collaborative risk meetings in preparation for the March deadline, but reaching this milestone” should not be the end of their operational resilience efforts.

“FMIs will need to continue to improve operational resilience as risks and technologies evolve — and be mindful of risks that could be posed by the process of introducing significant changes to the technology they use. Cyber threat actors who seek to harm the financial system will not stop developing their techniques, so FMIs need to remain vigilant to the changing threats they are exposed to.”

Innovation opportunities

Technology would also bring opportunities for firms to innovate, Mills said. “When safely implemented, [technology] can also be used to help ensure resilience at FMIs, for instance through the huge potential in artificial intelligence (AI) as a tool to help monitor market activity and risk.”

Technological advances, including tokenisation and atomic settlement, could thus enable a step change in the services FMIs provided.

Digital securities sandbox

Mills named the digital securities sandbox (DSS) as an example of how the Bank of England was delivering on its secondary objective, to facilitate growth of the UK economy. Its role, she said, was to give firms the “space to innovate” while protecting financial stability.

The DSS — a joint venture between the Bank and the Financial Conduct Authority (FCA) — opened to applications in September. To date, ClearToken CSD, Montis Digital UK and BPX Markets have passed Gate 1 registration, which allows them to test their systems in a non-live environment. With Gate 2 approval, firms can undertake live activity.

EMIR repeal

Mills said, repealing the UK European Market Infrastructure Regulation (EMIR) would also enable the Bank to create a simpler, more adaptable and dynamic rulebook for central counterparties (CCPs), which was aligned with international standards on margin transparency.