Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties29. Calculation of a central counterparty's credit exposure in terms of the current exposure method29.3 Legal and operational criteria |
| (1) | A central counterparty, that wishes to include in a netting set relating to a particular counterparty and the central counterparty exposures that arise from securities financing transactions or both securities financing transactions and OTC derivative contracts, must have in place a legally sound written bilateral netting agreement with that counterparty. |
| (2) | The agreement must create a single legal obligation covering all relevant close-out netting provisions so that, the central counterparty has either a claim to receive or an obligation to pay only the net sum of the relevant positive and negative close-out amounts and mark-to-market values in the event of any failure of the counterparty to perform in accordance with the transactions, contracts or agreements, irrespective whether or not the failure relates to default, insolvency proceeding or similar circumstances, provided that— |
| (a) | the central counterparty has in place written and reasoned legal opinions that conclude, with a high degree of certainty, that in the event of legal challenge the relevant courts or administrative authorities would find the central counterparty’s exposure in terms of the cross-product netting agreement to be the cross-product net amount under the laws of all relevant jurisdictions, and— |
| (i) | which legal opinions must— |
| (aa) | address the validity and enforceability of the cross-product netting agreement under its terms and the impact of the cross-product netting agreement on the material provisions of any included bilateral master agreement; |
| (bb) | be based on the legal framework of the relevant jurisdictions or communities; |
| (ii) | which laws of all relevant jurisdictions include— |
| (aa) | the law of the jurisdiction in which the counterparty is incorporated; |
| (bb) | the law that governs the relevant individual transactions; |
| (cc) | the law that governs any contract or agreement necessary to effect the netting; and |
| (b) | the central counterparty must— |
| (i) | have in place robust internal procedures to verify, prior to including a transaction in a netting set, that the transaction is covered by legal opinions that comply with the criteria in paragraph (a); |
| (ii) | regularly update all relevant legal opinions in order to ensure continued enforceability of the cross-product netting agreement in light of any possible changes in relevant law; |
| (iii) | ensure that the cross-product netting agreement does not contain any walk-away clause, that is, a provision that permits a non-defaulting counterparty to make only limited payments or no payment at all to the estate of the person that defaulted, even when the defaulting person is a net creditor; |
| (iv) | ensure that each relevant bilateral master agreement and transaction included in a cross-product netting agreement continuously complies with any relevant legal requirement in these Regulations that may have an impact on the legal recognition or enforceability of the bilateral agreement, contract or transaction; |
| (v) | maintain records of all relevant and required documentation; |
| (vi) | aggregate the relevant credit risk amounts relating to each relevant counterparty in order to obtain the single legal exposure amount across products and transactions covered by the cross-product netting agreement, which aggregated amount, among other things, must form part of the central counterparty’s risk management processes relating to credit risk, credit limits and economic capital; and |
| (vii) | demonstrate to the satisfaction of the Authority that the central counterparty effectively integrates the risk-mitigating effects of cross-product netting into its risk management and other information technology systems. |
| (3) | This Regulation does not make the close-out netting provision or the obligation thereunder enforceable and valid, if it would have been otherwise unenforceable or invalid in whole or in part in terms of the relevant law on grounds of fraud or other reasons affecting the validity and enforceability thereof. |
| (4) | The operation of the close-out netting provisions in these Regulations or the obligations thereunder are not dependant on the compliance with any requirement to report data relating to the obligations to a trade repository or any regulator. |