(1)
| (a) | A licensed central counterparty must annually conduct a comprehensive validation of its models, methodologies and liquidity risk management framework used to quantify, aggregate, and manage its risks. |
| (b) | Any material revisions or adjustments to its models, methodologies and liquidity risk framework must be subject to appropriate governance, including seeking advice from the risk committee, and validated by a qualified and independent party prior to application. |
(2)
| (a) | A central counterparty’s validation process must be documented and specify the policies used to test the central counterparty’s margin, default fund and other financial resources methodologies and framework for calculation. |
| (b) | Any material revisions or adjustments to the polices referred to in paragraph (a) must be subject to appropriate governance, including seeking advice from the risk committee, and validated by a qualified and independent party prior to application. |
(3) A comprehensive validation must include—
| (a) | an evaluation of the conceptual soundness of the models, methodologies and frameworks, including developmental supporting evidence; |
| (b) | a review of the on-going monitoring procedures, including verification of processes and benchmarking; |
| (c) | a review of the parameters and assumptions made in the development of its models, methodologies and the framework; |
| (d) | a review of the adequacy and appropriateness of the models, methodologies and framework adopted in respect of the type of contracts they apply to; |
| (e) | a review of the appropriateness of its stress testing scenarios in accordance with these Regulations; and |
| (f) | an analysis of the outcomes of testing results. |
| (4) | A central counterparty must establish the criteria against which it assesses whether its models, methodologies and liquidity risk management framework can be successfully validated, which must include successful testing results. |
| (5) | A central counterparty must, where pricing data is not readily available or reliable— |
| (a) | address such pricing limitations and adopt conservative assumptions based on observed correlated or related markets and current behaviours of the market; and |
| (b) | ensure that the systems and valuation models used for this purpose are subject to appropriate governance, including seeking advice from the risk committee, and validation and testing. |
(6) A central counterparty must—
| (a) | have its valuation models validated under a variety of market scenarios by a qualified and independent party to ensure that its models accurately produces appropriate prices, and where appropriate, it must adjust its calculation of initial margins to reflect any identified model risk; and |
| (b) | regularly conduct an assessment of the theoretical and empirical properties of its margin model for all the securities that it clears. |
