(1) A central counterparty must ensure that—
| (a) | it uses the margins posted by a defaulting clearing member prior to other financial resources in covering losses; |
| (b) | where the margins posted by the defaulting clearing member are not sufficient to cover the losses incurred by the central counterparty, it uses the default fund contribution of the defaulting member to cover those losses; |
| (c) | it uses dedicated own resources before using the default fund contributions of non-defaulting clearing members; |
| (d) | it does not use the margins posted by non-defaulting clearing members to cover the losses resulting from the default of another clearing member; and |
| (e) | it uses contributions to the default fund of the non-defaulting clearing members and any other financial resources referred to in Regulation 36 only after having exhausted the contributions of the defaulting clearing member. |
(2) A central counterparty—
| (a) | must keep, and indicate separately in its balance sheet, an additional amount of dedicated own resources for the purpose set out in subregulation (1)(c), which amount must be at least equal to 25% of the minimum capital, including retained earnings and reserves, held in accordance with Regulation 21; |
| (b) | must review the amount referred to in paragraph (a) on a yearly basis; |
| (c) | must, where it has established more than one default fund for the different classes of securities it clears,— |
| (i) | allocate the total dedicated own resources calculated under paragraph (a) to each of the default funds in proportion to the size of each default fund, and |
| (ii) | account separately in its balance sheet the resources so allocated and used for defaults arising in the different market segments to which the default funds refer to; |
| (d) | may not use resources other than capital, including retained earnings and reserves, as referred to in Regulation 21 to comply with the requirement under paragraph (a). |
| (3) | A central counterparty must immediately inform the Authority if the amount of dedicated own resources held falls below the amount required by subregulation (2)(a), together with the reasons for the breach and a comprehensive description in writing of the measures and the timetable for the replenishment of such amount. |
| (4) | Where a subsequent default of one or more clearing members occurs before the central counterparty has reinstated the dedicated own resources, only the residual amount of the allocated dedicated own resources must be used for the purpose of Regulation 36(1)(a). |
| (5) | A central counterparty must reinstate the dedicated own resource at least within one month from the notification under subregulation (3) and if not set out a plan to the Authority how to rectify. |
