UK: UK Bank Ring-Fencing – What Goes Where?

Last Updated: 29 July 2014
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

UK retail bank ring-fencing recently took a step forward as two important pieces of secondary legislation were laid before Parliament, where they now await approval. These documents define the activities which ring-fenced banks will and will not be allowed to carry out from January 2019. They build on last year's drafts, but there are some significant amendments, particularly in relation to 'simple' derivatives, the process for taking customers out of the ring-fence, payments, the treatment of the Crown Dependencies, and risk management. Here we focus on the main changes compared to the earlier drafts.

The first Order defines the 'core activities' which must be conducted through a ring-fenced bank, and the second sets out the 'excluded activities' which cannot be conducted by a ring-fenced bank, as well as associated exemptions. The two Orders account for the bulk of the secondary legislation, with loss absorbency and the treatment of pensions the two main outstanding areas. A revised version of the legislation on loss absorbency is notable by its absence, with the Government having said that it is waiting for discussions to progress at the international level through the Financial Stability Board, where a vigorous debate continues.

The Orders are something of a mixed blessing. On the on hand there has been a streamlining of the process for keeping certain customers out of the ring-fence, and there has been an extension of the range of 'simple' derivatives ring-fenced banks can provide to their customers. On the other hand, the Government has removed the possibility of ring-fenced banks having branches in the Crown Dependencies, and the situation remains ambiguous with respect to payments and loss absorbency, where we will have to wait for further rulemaking for the details.

There is now more clarity on what is in or out of the ring-fence, the drafting is tighter, and various technical changes have been made. But this is only the second of three tiers of rule-making – the third tier (the PRA rules) remains, like the majority of an iceberg, wholly out of sight.

Derivatives – options allowed

Caps and floors (along with all other options) had been ruled out in last year's draft, but ring-fenced banks will now be permitted to provide certain caps and floors to their customers, as well as certain currency and commodity options. The types of derivatives ring-fenced banks will be able to provide will therefore be: currency swaps; interest rate swaps; currency and commodity forwards; certain options in relation to currencies and commodities; interest rate caps and floors; and interest rate 'swaptions' (i.e. giving the customer the option of entering into an interest rate swap).

However, these derivatives activities are subject to additional constraints: a ring-fenced bank's net position risk requirement will be limited to 0.5% of its own funds, and the sum of the position risk requirements for each transaction, without netting, will be limited to 25% of its credit risk requirement (which thresholds have been retained from the previous draft); their values must be assessable based on observable data (such as quoted market prices, or any other level 1 or 2 input under IFRS 13); and the derivatives will be restricted to those which can be traded on EEA trading venues, such as multilateral trading facilities, or recognised third country trading venues. This latter (new) criterion excludes non-standard OTC derivatives, although it should be noted that the universe of derivatives traded on venues is set to increase under MiFID II, which requires all standardised derivatives to be traded on regulated markets.

It is also important to note that ring-fenced banks are allowed exposures to recognised clearing houses and central counterparties – these are exempt from the general prohibition on financial institution exposures.

Process – opting out of the ring-fence

The process for enabling large companies and high net worth individuals to deposit outside the ring-fence has been somewhat simplified – where previously they were required to submit declarations signed by an accountant, large companies can now submit a copy of their annual accounts, and banks can accept declarations from HNWIs without a confirming statement if they are "satisfied that the declaration of eligibility is true." Most obviously, this means that a bank which has all the necessary information about a HNWI (e.g. because that individual has an account with the bank), will not need that declaration to be signed by an accountant. However, the bank will still have to process and validate declarations. The requirement to renew declarations on a regular basis has also been omitted.

There is a new requirement for non-ring-fenced banks to provide information to individual prospective customers to enable them to make an informed decision about where they place their deposits. The FCA will specify the information to be provided, but at a minimum it will include a description of the trading activities the non-ring-fenced bank carries out.

Crown Dependencies

In last year's drafts, there was an exemption to allow ring-fenced banks to maintain branches in the Crown Dependencies, despite otherwise being prohibited from having non-EEA branches or subsidiaries. The Treasury had said that deposits in the Crown Dependencies "play an important part in the funding mix and liquidity base of UK ring-fenced banks" and that as such, "access of UK ring-fenced banks to the Crown Dependencies has positive consequences for UK financial stability." However, this exemption has been removed – ring-fenced banks will not be permitted branches (or subsidiaries) in these territories. The documents do not give any explanation for the change of stance.


The drafting on payments activities has changed considerably. Where previously there was a detailed framework describing permitted payments exposures (with limits on the volume of payments ring-fenced banks could process on behalf of other banks, and a requirement that any such payment exposures should be reported in real-time), there is now only a matter of a few lines: the detail has been replaced with a statement that ring-fenced banks can have payment exposures to financial institutions, but only if the exposures comply with rules to be written by the PRA or FCA. This means that the details of the payments framework remain essentially unknown, and we will have to wait for the regulators to substantiate it.

Own risk management

The drafting to allow ring-fenced banks to manage their own risks has become more precise, making it clear that a ring-fenced bank can manage its own risks, as well as those of its subsidiaries, any of its securitisations or structured finance vehicles, and any of its other conduits. Furthermore, the list of risks for which it is permitted to trade for risk management purposes has been expanded to include indexes of retail prices or residential or commercial property prices, as well as any index of the price of shares, in addition to the original categories of interest rates, exchange rates, commodity prices, default risk, and liquidity risk. There is no restriction on the types of instruments a ring-fenced bank can use to manage its own risks – complex derivatives are permitted for these purposes – although derivatives used to hedge customer-related derivatives exposures will be incorporated into the position risk limits discussed above.

Ring-fenced banks are also now enabled to have exposures to non-systemically important insurance companies in general, and are permitted exposures to any insurance company (including those designated as global systemically important insurers (G-SIIs)) in order to buy insurance products needed in the general course of conducting business (such as buildings insurance).

What next?

The Government looks to be on track to meet its commitment to finalise all the legislation in relation to ring-fencing by the end of the current Parliament. But this is only a part of the picture – for many, the main event will be the PRA's ring-fencing rules which will define permissible relationships between ring-fenced and non-ring-fenced banks, permissible governance structures, and other crucial issues in relation to the operations of UK banking groups. The UK is clearly intent on developing its framework, notwithstanding what might emerge from Brussels on the EU's bank structural reform agenda.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.