| (1) | A central counterparty’s capital must at all times be more than or equal to the greater of the following amounts: |
| (a) | Permanent and available initial capital of at least R50 million and the appropriate buffer; or |
| (b) | Capital, including retained earnings and reserves, proportionate to the risk stemming from the activities of the central counterparty; and |
| (c) | Capital that is at all times sufficient to ensure an orderly winding-up or restructuring of the activities over an appropriate time span and an adequate protection of the central counterparty against credit, counterparty, market, operational, legal and business risks. |
| (2) | Subject to the provisions in subregulation (4), a central counterparty must hold qualifying capital after deductions, which must be at all times more than or equal to the sum of the central counterparty’s capital requirements for— |
| (a) | operational risk calculated in accordance with Regulation 25; |
| (b) | credit risk, counterparty credit risk and market risk calculated in accordance with Regulation 23; and |
| (c) | business risk calculated in accordance with Regulation 24. |
| (3) | The Authority may impose any of the requirements set out in subregulation (4) when of the opinion that, a central counterparty’s— |
| (a) | calculated aggregate risk exposure does not sufficiently reflect— |
| (i) | the central counterparty’s actual risk profile; |
| (ii) | the factors external to the central counterparty, such as the effect of business cycles; |
| (iii) | the risk relating to a particular type of exposure such as credit risk, counterparty credit risk, market risk, operational risk, legal and business risk or in respect of an orderly winding-up or restructuring; and |
| (iv) | the concentration risk; |
| (b) | qualifying capital is likely to be overstated due to, for example, reserves that are subject to material volatility as a result of short-term fair value gains or adjustment; |
| (c) | policies, processes and procedures relating to its risk assessment are inadequate; |
| (d) | policies, processes and procedures relating to compensation or remuneration are inadequate;2 or |
| (e) | internal control systems are inadequate. |
| (4) | The Authority may require a central counterparty, in accordance with subregulation (3), to— |
| (a) | maintain additional capital, calculated in such a manner and subject to such conditions as may be determined by the Authority; |
| (b) | deduct from its qualifying capital such amount calculated in such a manner and subject to such conditions as may be determined by the Authority; |
| (c) | strengthen the central counterparty’s risk management policies, processes or procedures; |
| (d) | align the central counterparty’s compensation or remuneration policies, processes or procedures with the central counterparty’s relevant exposure to risk; or |
| (e) | strengthen the central counterparty’s internal control systems. |
| (5) | A central counterparty must— |
| (a) | have procedures in place to identify all sources of risks that may impact its operations; and |
| (b) | consider the likelihood of potential adverse effects on its revenues or expenses and its level of qualifying capital. |
(6)
| (a) | If the amount of qualifying capital held by a central counterparty is lower than 110% of the amount calculated according to subregulation (2) or lower than 110% of R50 million (notification threshold), the central counterparty must immediately notify the Authority and keep the Authority updated on at least a weekly basis, until the amount of qualifying capital held by the central counterparty returns above the notification threshold. |
| (b) | The notification must be made in writing and must contain— |
| (i) | the reasons for the central counterparty’s qualifying capital being below the notification threshold and a description of the short-term perspective of the central counterparty’s financial situation; |
| (ii) | a comprehensive description of the measures that the central counterparty intends to adopt to ensure its on-going compliance with the capital requirements and must include among other things, the central counterparty’s— |
| (aa) | controlling body-approved risk appetite or tolerance for risk; |
| (bb) | controlling body-approved business strategy; |
| (cc) | risk profile and control environment; |
| (dd) | future capital needs; |
| (ee) | controlling body approved target level of capital; |
| (ff) | stress-testing results; and |
| (gg) | any additional buffer of qualifying capital above the notification threshold as the controlling body and the senior management of the central counterparty may determine. |
| (7) | In addition to any other provision contained in these Regulations, when a licensed central counterparty’s qualifying capital is significantly reduced or depleted, including as a result of unexpected severe financial distress or economic downturn, the Authority may, after consultation with the relevant central counterparty, in writing impose constraints on the central counterparty, such as capital distribution constraints, until the central counterparty’s qualifying capital is restored above the notification threshold specified in subregulation (6)(a) plus the target level of capital specified in subregulation (6)(b)(ii)(ee). |
| (8) | A central counterparty must have in place as a minimum a sound capital assessment process, which capital assessment process must include— |
| (a) | controlling body approved policies and procedures designed to ensure that the central counterparty identifies, measures, and reports all material risk exposures; |
| (b) | all material risk exposures incurred by the central counterparty. |
| (9) | Although a licensed central counterparty may not be able to accurately measure all risk exposures, the central counterparty must develop and implement an appropriate framework and process to estimate the key elements of the central counterparty’s material risk exposures which must— |
| (a) | relate the central counterparty’s capital to the level of risk incurred by the central counterparty; |
| (b) | be based on the central counterparty’s strategic focus and business plan and clearly state its objectives in respect of capital adequacy and risk exposure; |
| (c) | incorporate rigorous, forward-looking stress testing that identifies possible events or changes in market conditions that could adversely impact the central counterparty, the results of which stress testing must be considered when the central counterparty evaluates the adequacy of its target level of capital as specified in subregulation (6)(b)(ii)(ee); and |
| (d) | promote the integrity of the central counterparty’s overall risk-management process by way of internal controls and appropriate internal and external reviews and audit. |
2 For example, when the central counterparty’s compensation or remuneration policies, processes and procedures, particularly in respect of bonus or other discretionary payments, do not duly incorporate all relevant material types of risk, or when bonus or other discretionary payments are finalised over short periods without adequate regard for related material risk exposure carried by the central counterparty over a longer period.
