| (1) | A central counterparty must maintain sufficient prefunded available financial resources— |
| (a) | to cover potential losses that exceed the losses to be covered by margin requirements under Regulation 33 and the default fund under Regulation 35; |
| (b) | which must include dedicated resources of the central counterparty; |
| (c) | which must be freely available to the central counterparty; and |
| (d) | which may not be used to meet the capital required under Regulation 21. |
| (2) | The default fund referred to in Regulation 35 and the other financial resources referred to in subregulation (1) must at all times enable the central counterparty to withstand the default of the clearing member to which it has the largest exposure or, in the case where it is involved in activities with a more complex risk profile, the default of the second and third largest clearing members under extreme but plausible market conditions. |
(3) A central counterparty—
| (a) | may require non-defaulting clearing members to provide additional funds in the event of a default of another clearing member; and |
| (b) | must ensure that clearing members have limited uncovered exposure toward the central counterparty. |
| (4) | To determine the minimum size of the default fund and the amount of other financial resources necessary to satisfy the requirements of subregulations (1) and (2), taking into account group dependencies, a central counterparty must implement an internal policy framework for defining the types of extreme but plausible market conditions that could expose it to greatest risk. |
(5) The framework must—
| (a) | be fully documented, retained and include a statement describing how the central counterparty defines extreme but plausible market conditions; |
| (b) | be discussed by the risk committee and approved by the controlling body of the central counterparty; |
| (c) | reflect the risk profile of the central counterparty, taking account of cross-border and cross-currency exposures where relevant; |
| (d) | identify all the market risks to which a central counterparty would be exposed following the default of one or more clearing member, including unfavourable movements in the market prices of cleared instruments, reduced market liquidity for these instruments, and declines in the liquidation value of collateral; |
| (e) | reflect additional risks to the central counterparty arising from the simultaneous failure of entities in the group of the defaulting clearing member; |
| (f) | individually identify all the markets to which a central counterparty is exposed in a clearing member default scenario, and for each identified market the central counterparty must specify extreme but plausible conditions based, at least on— |
| (i) | a range of historical scenarios, including periods of extreme market movements observed over the past 30 years, or as long as reliable data have been available, that would have exposed the central counterparty to greatest financial risk, and if a central counterparty decides that recurrence of a historical instance of large price movements is not plausible, it must justify its omission from the framework to the Authority; and |
| (ii) | a range of potential future scenarios, founded on consistent assumptions regarding market volatility and price correlation across markets and securities, drawing on both quantitative and qualitative assessments of potential market conditions; |
| (g) | consider, quantitatively and qualitatively, the extent to which extreme price movements could occur in multiple identified markets simultaneously; and |
| (h) | recognise that historical price correlations may breakdown in extreme but plausible market conditions. |
| (6) | A central counterparty must at least annually, and more frequently when market developments or material changes to the set of contracts cleared by the central counterparty may dictate an adjustment to the scenarios, in consultation with the risk committee,— |
| (a) | review the framework to test its robustness and its ability to reflect market movements, and the review must be discussed by the risk committee and reported to the controlling body; |
| (b) | ensure that the review takes into account all relevant market developments and the scale and concentration of clearing member exposures; |
| (c) | review the set of historical and hypothetical scenarios used by a central counterparty to identify extreme but plausible market conditions; and |
| (d) | report material changes to the framework to the controlling body and the Authority. |
| (7) | If a central counterparty maintains prearranged funding arrangements, the central counterparty must— |
| (a) | identify, measure and monitor its liquidity risk from the liquidity providers of those arrangements; |
| (b) | obtain a high degree of confidence through rigorous due diligence that each liquidity provider, whether or not it is a clearing member of the central counterparty, has the capacity to perform as required under the liquidity arrangement and is subject to commensurate regulation, supervision or oversight of its liquidity risk management requirements. |
