Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties34. Default procedures |
| (1) | A central counterparty must have default procedures that are publically available and that— |
| (a) | enable it to continue to meet its obligations in the event of a clearing member default; |
| (b) | address the replenishment of resources following a default; |
| (c) | clearly state the scope of duties and term of service expected from seconded personnel; |
| (d) | provide that the central counterparty may elect to auction positions or portfolios to the market, and clearly state the scope for such action, and any clearing member obligations with regard to such auctions; and |
| (e) | facilitate the prompt close-out or transfer of a defaulting clearing member’s proprietary and client positions. |
| (2) | A central counterparty must— |
| (a) | test and review its default procedures, including any close-out procedures— |
| (i) | annually; or |
| (ii) | following material changes to the rules and procedures to ensure that they are practical and effective; and |
| (b) | involve its clearing members and other relevant stakeholders in the testing and review. |
| (3) | A central counterparty must— |
| (a) | have the ability to apply the proceeds of liquidation, along with other funds and assets of the defaulting clearing member, to meet the defaulting clearing member’s obligations; |
| (b) | have the information, resources, and measures to close out positions promptly; and in circumstances where prompt closeout is not practicable, it must have the measures to hedge positions as an interim risk-management technique; |
| (c) | take prompt action to contain losses and liquidity pressures resulting from defaults; |
| (d) | ensure that the closing-out of any clearing member’s positions does not disrupt its operations or expose the non-defaulting clearing members to losses that they cannot anticipate or control; |
| (e) | immediately inform the Authority before the default procedure is declared or triggered if it considers that the clearing member will not be able to meet its future obligations; and |
| (f) | verify that its default procedures are enforceable and it must take all reasonable steps to ensure that it has the legal powers to liquidate the proprietary positions of the defaulting clearing member and to transfer or liquidate the clients’ positions of the defaulting clearing member. |
| (4) | Where assets and positions are recorded in the records and accounts of a central counterparty as being held for the account of a defaulting clearing member’s clients in accordance with Regulation 32(3)(b), the central counterparty must— |
| (a) | contractually commit itself to trigger the procedures for the transfer of the assets and positions held by the defaulting clearing member for the account of its clients to another clearing member designated by all of those clients, on their request and without the consent of the defaulting clearing member; |
| (b) | ensure that other clearing members are obliged to accept those assets and positions only where it has previously entered into a contractual relationship with the clients by which it has committed itself to do so; and |
| (c) | if the transfer to that other clearing member has not taken place for any reason within a predefined transfer period specified in its operating rules, take all steps permitted by its rules to actively manage its risks in relation to those positions, including liquidating the assets and positions held by the defaulting clearing member for the account of its clients. |
| (5) | Where assets and positions are recorded in the records and accounts of a central counterparty as being held for the account of a defaulting clearing member’s client in accordance with Regulation 32(3)(c) the central counterparty must— |
| (a) | contractually commit itself to trigger the procedures for the transfer of the assets and positions held by the defaulting clearing member for the account of the client to another clearing member designated by the client, on the client’s request and without the consent of the defaulting clearing member; |
| (b) | ensure that other clearing member is obliged to accept these assets and positions only where it has previously entered into a contractual relationship with the client by which it has committed itself to do so; |
| (c) | if the transfer to that other clearing member has not taken place for any reason within a predefined transfer period specified in its operating rules, take all steps permitted by its rules to actively manage its risks in relation to those positions, including liquidating the assets and positions held by the defaulting clearing member for the account of the client. |
| (6) | A central counterparty must ensure that clients’ collateral distinguished in accordance with Regulations 32(3)(b) and (c) is used exclusively to cover the positions held for their account and any balance owed by the central counterparty after the completion of the clearing member’s default management process by the central counterparty must be readily returned to those clients when they are known to the central counterparty or, if they are not, to the clearing member for the account of its clients. |