Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties20. Custody, settlement and physical deliveries |
| (1) | A licensed central counterparty must hold its own and the assets provided by clearing members at a custodian that has robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets. |
| (2) | A licensed central counterparty must— |
| (a) | have prompt access to its assets and the assets provided by clearing members, when required, and timely availability and access must be ensured even if these securities are held in another time zone or jurisdiction; |
| (b) | avoid the concentration of holding of assets and ensure that assets can be liquidated quickly without significant adverse price effects; |
| (c) | ensure that cash balances are invested or held in safekeeping in a manner that bears no or little principal risk; |
| (d) | ensure that its interest or ownership rights in the assets can be enforced; |
| (e) | evaluate and understand its exposures to its custodian, taking into account the full scope of its relationships with each custodian; |
| (f) | clearly state its obligations with respect to deliveries of cash and securities, including whether it has an obligation to make or receive delivery of cash or securities or whether it indemnifies participants for losses incurred in the delivery process; |
| (g) | provide clear and certain final settlement, at a minimum by the end of the value date and where necessary a central counterparty must provide final settlement intra-day or in real time; and |
| (h) | take reasonable steps to confirm the effectiveness of cross-border recognition and protection of cross-system settlement finality, especially when it is developing plans for recovery or orderly wind-up or providing supervisory authorities information relating to its resolvability. |
(3)
| (a) | A central counterparty must conduct its cash settlements in central bank money where practical. |
| (b) | Where central bank money is not used, a central counterparty must minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money. |
| (4) | A central counterparty must— |
| (a) | ensure that its settlement banks are regulated and supervised in their jurisdictions and that they comply with requirements of creditworthiness, capitalisation, access to liquidity, and operational reliability; |
| (b) | monitor and manage the concentration of credit and liquidity exposures to its commercial settlement banks; |
| (c) | where it conducts money settlements on its own books, it must minimise and strictly control its credit and liquidity risks; |
| (d) | ensure that its legal agreements with any settlement banks clearly state |
| (i) | when transfers on the books of individual settlement banks are expected to occur; |
| (ii) | that transfers are to be final when effected; and |
| (iii) | that funds received must be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the central counterparty and its clearing members to manage credit and liquidity risks. |
| (5) | Where a central counterparty has an obligation to make or receive deliveries of physical instruments or commodities, it must have appropriate processes and procedures that— |
| (a) | clearly state its obligations with respect to the delivery of physical instruments or commodities; |
| (b) | identify, monitor and manage the risks associated with the storage and delivery of physical instruments or commodities; |
| (c) | eliminate principal risk through the use of delivery-versus-payment mechanisms to the extent possible; |
| (d) | set out the controls to manage the risks of storing and delivering physical assets such as the risk of theft, loss, counterfeiting or deterioration of assets; |
| (e) | ensure that its record of physical assets accurately reflects its holding of assets; |
| (f) | clearly state which asset classes it accepts for physical delivery; |
| (g) | set out the procedures surrounding the physical delivery of each asset class; |
| (h) | indemnify clearing members for losses incurred in the physical delivery process; |
| (i) | establish definitions for acceptable physical instruments or commodities in order to plan for and manage physical deliveries; |
| (j) | provide for appropriate alternative physical delivery locations or assets; |
| (k) | where applicable, provide for rules for warehouse operations that take into account the commodity’s particular characteristics; |
| (l) | stipulate the timing of physical delivery; |
| (m) | provide for appropriate pre-employment checks and training for personnel who handle physical assets; and |
| (n) | provide for insurance coverage and random storage facility audits, to mitigate its storage and physical delivery risks. |
| (6) | A licensed central counterparty must have rules that provide— |
| (a) | for the legal obligations for delivery; |
| (b) | clarity on whether the receiving clearing member must seek compensation from the central counterparty or the delivering clearing member in the event of a loss; |
| (c) | for its obligations with respect to the delivery of physical instruments or commodities; and |
| (d) | that the central counterparty holding margin may not release the margin of the matched clearing member until it confirms that both have fulfilled their respective obligations. |
| (7) | A central counterparty licensed to provide functions in respect of commodities may match clearing members that have physical delivery obligations with those due to receive the commodities, thereby removing itself from direct involvement in the storage and physical delivery process. |
| (8) | A licensed central counterparty must ensure that its clearing members have the necessary systems and resources to be able to fulfil their physical delivery obligation. |