Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties33. Margin requirements33.2 Margin system |
| (1) | A central counterparty must have a margin system that— |
| (a) | establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves; |
| (b) | has a reliable source of timely price data; |
| (c) | has procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable; |
| (d) | adopts initial margin models and parameters that— |
| (i) | are risk-based and generate margin requirements sufficient to cover its potential future exposure to clearing members in the interval between the last margin collection and the close out of positions following a clearing member default; |
| (ii) | will establish single-tailed confidence levels of at least 99% with respect to the estimated distribution of future exposure, provided that where a central counterparty calculates margin at— |
| (aa) | the portfolio level, the requirement will apply to each portfolio’s distribution of future exposure; or |
| (bb) | sub-portfolio or by product level, the requirement will apply for corresponding distributions of future exposure. |
| (2) | The margin model must— |
| (a) | use a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the central counterparty, also in stressed market conditions; |
| (b) | use an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products; and |
| (c) | to the extent practicable and prudent, limit the need for destabilising, procyclical changes. |
| (3) | A central counterparty— |
| (a) | must mark clearing members’ positions to market and collect variation margin at least daily to limit the build-up of current exposures; |
| (b) | must have the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to clearing members; |
| (c) | in calculating margin requirements, may allow offsets or reductions in required margin across products that it clears or between products that it and another central counterparty clear, if the risk of one product is significantly and reliably correlated with the risk of the other product; |
| (d) | must analyse and monitor its model performance and overall margin coverage by conducting rigorous daily back-testing and at least monthly, and more frequent where appropriate, sensitivity analysis; |
| (e) | must conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears at least annually; |
| (f) | must take into account a wide range of parameters and assumptions that reflect possible market conditions, including the most volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices when conducting the sensitivity analysis of the model’s coverage; |
| (g) | must at least annually review and validate its margin system by a qualified independent person, and report its finding to the Authority; |
| (h) | must impose, call and collect margins to limit its credit exposures from its clearing members and, where relevant, from central counterparties with which it has interoperability arrangements; where such margins must be sufficient to cover— |
| (i) | potential exposures that the central counterparty estimates will occur until the liquidation of the relevant positions; and |
| (ii) | losses that result from at least 99% of the exposures movements over an appropriate time horizon; |
| (i) | must ensure that it fully collateralises its exposures with all its clearing members, and, where relevant, with central counterparties with which it has interoperability arrangements, at least on a daily basis; |
| (j) | must regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of such revisions; |
| (k) | must adopt models and parameters in setting its margin requirements that capture the risk characteristics of the products cleared and take into account the interval between margin collections, market liquidity and the possibility of changes over the duration of the transaction; |
| (l) | must call and collect margins on an intraday basis, at least when predefined thresholds are exceeded; |
| (m) | must call and collect margins that are adequate to cover the risk stemming from the positions registered in each account; and |
| (n) | must have appropriate safeguards and harmonised overall risk-management systems, where two or more central counterparties are authorised to offer cross-margining. |