Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties27. Capital calculation requirements for credit risk27.2 Exposure to central counterparties, clearing members and matters related to delivery-versus-payment transactions and non-delivery-versus-payment or free-delivery-transactions |
| (1) | A licensed central counterparty must calculate its exposure to another central counterparty arising from any relevant OTC derivative, exchange traded derivative instrument or securities financing transaction, and the central counterparty’s related required amount of capital, in accordance with the relevant requirements specified in these Regulations, including— |
| (a) | any relevant exposures arising from the settlement of cash transactions in respect of equities, fixed income, foreign exchange spot contract or spot commodities must be calculated in accordance with the relevant requirements specified below related to delivery versus payment transactions, and non- delivery versus payment or free delivery transactions. |
| (b) | any delivery-versus-payment transaction, that is, any transaction settled through a delivery-versus-payment system,— |
| (i) | which system makes provision for the simultaneous exchanges of securities for cash, including payment versus payment; |
| (ii) | which transaction exposes the central counterparty to a risk of loss equal to the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price, that is, the positive current exposure amount; |
| (iii) | which transaction may include the settlement of commodities; foreign exchange; securities; and settlement through a licensed exchange, licensed central securities depository, licensed clearing house or licensed central counterparty, and which transactions are subject to daily mark-to-market, payment of daily variation margins and involve a mismatched trade; |
| (c) | any non-delivery-versus-payment or free-delivery transaction, that is, any transaction in respect of which cash is paid out without receipt of the contracted receivable, which receivable may include a security, foreign currency, gold or a commodity, or conversely, any transaction in respect of which deliverables were delivered without receipt of the contracted cash payment, which transaction exposes the central counterparty to a risk of loss equal to the full amount of the cash amount paid or deliverables delivered, calculate its required amount of capital in accordance with the relevant requirements specified in these Regulations. |
| (2) | Subregulation (1) does not apply to— |
| (a) | to any repurchase agreement, resale agreement, securities lending transaction or securities borrowing transaction that has failed to settle, |
| (b) | to any forward contract or one-way cash payment due in respect of an OTC derivative, |
which agreement, contract or transaction must be subject to the relevant requirements specified in these Regulations.
| (3) | In the case of a system wide failure of a settlement or clearing system, or a central counterparty, the Authority may, subject to such conditions as may be determined by the Authority, exempt a central counterparty from the requirements specified in subregulation (4). |
| (4) | A central counterparty must— |
| (a) | in the case of any delivery-versus-payment transaction in respect of which payment has not taken place in the period of five business days after the contracted settlement date, calculate its required amount of capital by multiplying the relevant positive current exposure amount with the relevant percentage specified in the Table below. |
Number of working days after the contracted settlement date |
Risk multiplier |
From 5 to 15 |
8% |
From 16 to 30 |
50% |
From 31 to 45 |
75% |
46 or more |
100% |
| (b) | in the case of any non-delivery-versus-payment or free-delivery transaction, after the first contractual date relating to payment or delivery when the relevant second leg has not been received at the end of the relevant business day, treat the relevant payment made as a loan exposure, that is, a central counterparty that adopted the standardised approach must calculate its risk-weighted exposure and related required amount of capital in accordance with the relevant requirements specified in this Regulation, provided that when the relevant exposure amount is not material, the central counterparty may choose to apply a risk weight of 100% to the exposure amount; and when five business days have lapsed following the second contractual payment or delivery date and the second leg has not effectively taken place, the central counterparty that made the first payment leg must deduct from its capital the full amount of value transferred plus any relevant replacement cost until the second payment or delivery leg is effectively made. |
| (5) | A central counterparty must ensure that it continuously maintains sufficient capital for all relevant exposures related to counterparty credit risk, including in respect of any relevant exposure to a qualifying central counterparty, that is, the central counterparty must, consider whether it needs to maintain capital in excess of the minimum required capital specified in terms of the provisions of this Regulation when the central counterparty’s relevant transactions with a qualifying central counterparty give rise to more risky exposures than what is envisaged in these Regulations or when the central counterparty is uncertain whether or not the relevant counterparty may indeed be regarded as a qualifying central counterparty. |
| (6) | A central counterparty must on a regular basis monitor and report to its senior management and the appropriate committee of the central counterparty’s controlling body. |
| (7) | When a central counterparty interoperates with a qualifying central counterparty, it must, in respect of all relevant OTC derivatives, exchange traded derivative instruments and securities financing transactions, apply a risk weight of 2% to the central counterparty’s relevant trade exposure to the qualifying central counterparty, provided that— |
| (a) | the central counterparty must calculate the relevant exposure amount for such trade exposure in accordance with the relevant requirements related to the current exposure method specified in the Regulations, provided that the relevant netting set does not contain illiquid collateral or exotic trades and provided there are no disputed trades; |
| (b) | when settlement is legally enforceable on a net basis in an event of default and regardless of whether the counterparty is insolvent or bankrupt, the central counterparty may calculate the relevant total replacement cost of all contracts relevant to the trade exposure on a net replacement cost basis, provided that the relevant close-out netting sets must comply with all the relevant requirements specified in these Regulations; |
| (c) | when a central counterparty is unable to demonstrate to the satisfaction of the Authority that all relevant netting agreements meet the requirements in these Regulations, it must regard each relevant single transaction as a netting set of its own for purposes of calculating its relevant trade exposure amount. |
| (8) | Subject to the prior written approval of and such conditions as may be determined by the Authority, when a central counterparty no longer meets the relevant requirements related to a qualifying central counterparty, the central counterparty must immediately notify the Authorities and may continue to treat all relevant transactions with that counterparty in accordance with the relevant requirements specified in these Regulations for a maximum period of up to three months following the date on which that central counterparty no longer meets the requirements, where after the central counterparty must calculate its relevant exposure and the related required amount of capital in accordance with the relevant requirements specified in these Regulation. |