Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties13. Risk management framework13.1 General |
| (1) | A central counterparty must ensure that an adequate, effective and on-going process of risk management is established and maintained, which— |
| (a) | is consistent with the nature, complexity and risk inherent in the central counterparty’s on-balance sheet and off-balance sheet activities; |
| (b) | responds to changes in the central counterparty’s environment and conditions; and |
| (c) | must include the maintenance of effective capital management by a central counterparty. |
| (2) | In order to achieve the objective relating to the maintenance of effective risk management and capital management envisaged in subregulation (1), central counterparty must have in place a comprehensive and documented risk management framework approved by the controlling body to identify, measure, monitor, control, and appropriately communicate or report on all risks associated with its activities. |
| (3) | The risk management framework must as a minimum— |
| (a) | identify the range of risks that arise within the central counterparty and the risks it directly bears from or poses to its clearing members, its clearing members’ clients and other entities; |
| (b) | be aligned with, and, where appropriate, provide specific guidance for the successful implementation of and the continued adherence to, the business strategy, goals and objectives, and the risk appetite or tolerance for risk, of the central counterparty; |
| (c) | provide for the employment of robust information and risk-control systems to provide the central counterparty with the capacity to obtain timely information necessary to apply risk- management policies and procedures; |
| (d) | provide incentives to clearing members and, where relevant, their clients to manage and contain the risks they pose to the central counterparty; |
| (e) | provide for appropriate plans for its recovery or orderly winding-up and contain, among other elements, a substantive summary of the key recovery or orderly wind-up strategies, the identification of the central counterparty’s critical operations and functions, and a description of the measures needed to implement the key strategies; |
| (f) | provide for comprehensive internal control mechanisms to help the controlling body and senior management monitor and assess the adequacy and effectiveness of the central counterparty’s risk-management framework and includes sound administrative and accounting procedures, a robust compliance function and an independent internal audit and validation or review function; |
| (g) | be adequate for the size and nature of the activities of the central counterparty, including the central counterparty’s activities relating to risk mitigation, trading and exposure to counterparty credit risk, and periodically adjusted in the light of the changing risk profile or financial strength of the central counterparty, financial innovation or external market developments; |
| (h) | specify relevant limits and allocated capital relating to the central counterparty’s various risk exposures; |
| (i) | be sufficiently robust to— |
| (i) | identify and manage material interrelationships between the central counterparty’s relevant risk exposures; |
| (ii) | ensure the central counterparty’s continued compliance with the relevant documented set of internal policies, controls and procedures; |
| (iii) | ensure that the central counterparty captures the economic substance and not merely the legal form of the central counterparty’s various exposures to risk; |
| (iv) | ensure that the central counterparty conducts sufficiently robust and independent due diligence in respect of the central counterparty’s respective investment in or exposure to instruments, products or markets, and that the central counterparty, for example, does not merely or solely rely on an external credit rating when investing in a particular product or instrument; |
| (v) | ensure that the central counterparty regularly conducts appropriate stress-testing or scenario analysis; |
| (vi) | ensure that the central counterparty maintains sufficient liquidity and capital adequacy buffers to remain solvent during prolonged periods of financial market stress and illiquidity; |
| (vii) | clearly delineate accountability and all relevant lines of authority across the central counterparty’s various business units, lines or activities, and ensure that a clear separation exists between all relevant business units, lines or activities, and any relevant risk or control function; |
| (viii) | ensure that, prior to its initiation, all relevant risk management, control and business units or lines appropriately review and assess proposed new activities, investment in new instruments or the introduction of new products for clearing, to ensure that the central counterparty will be able to continuously manage and control the relevant activity, investment or product; |
| (ix) | ensure that the central counterparty is able to appropriately aggregate or consolidate all relevant risks or exposure to risk; |
| (x) | ensure on-going, accurate, appropriate and timely communication or reporting of the central counterparty’s relevant risk exposures and any material deviation from approved policies, processes or procedures to the senior management and the controlling body; |
| (xi) | ensure that the central counterparty’s controlling body and senior management receive timely and appropriate information regarding the condition of the central counterparty’s respective asset portfolios, including matters related to the relevant classification of credit exposure, the level of impairment or provisioning, and major problem assets; |
| (xii) | enable the proactive management of all relevant risks; |
| (xiii) | ensure that any breach of an internal limit is duly escalated and addressed; |
| (xiv) | timeously detect potential criminal activities and prevent undue exposure to criminal activities; and |
| (xv) | ensure proper oversight of any relevant outsourced function. |