Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties38. Collateral requirements38.1 Haircuts |
| (1) | A central counterparty that accepts collateral with credit, liquidity, and market risks above minimum levels must demonstrate that it sets and enforces appropriately conservative haircuts and concentration limits. |
| (2) | A central counterparty must ensure that the haircuts— |
| (a) | reflect the potential for asset values and liquidity to decline over the interval between their last revaluation and the time by which a central counterparty can reasonably assume that the assets can be liquidated; |
| (b) | incorporate assumptions about collateral value during stressed market conditions and reflect regular stress testing that takes into account extreme price moves, as well as changes in market liquidity for the asset; and |
| (c) | are calibrated to include periods of stressed market conditions, to the extent practicable and prudent in order to reduce the need for procyclical adjustments. |
| (3) | A central counterparty must— |
| (a) | establish and implement policies and procedures to determine prudent haircuts to apply to collateral value; |
| (b) | demonstrate to the Authority that haircuts are calculated in a conservative manner to limit as far as possible procyclical effects; |
| (c) | for each collateral asset, determine the haircut taking in consideration the relevant criteria, including— |
| (i) | the type of asset and level of credit risk associated with the financial instrument based upon internal assessment by the central counterparty; |
| (ii) | the maturity of the asset; |
| (iii) | the historical and hypothetical future price volatility of the asset in stressed market conditions; |
| (iv) | the liquidity of the underlying market, including bid or ask spreads; |
| (v) | the foreign exchange risk, if any; |
| (vi) | wrong-way risk; and |
| (vii) | the need for the collateral to be liquidated in stressed market conditions and the time required to liquidate it; |
| (d) | monitor on a regular basis the adequacy of the haircuts; |
| (e) | review the haircut policies and procedures at least annually and whenever a material change occurs that affects the central counterparty risk exposure; |
| (f) | ensure that haircut policies and procedures are independently validated at least annually. |