A central counterparty must—
| (a) | conduct sensitivity tests and analysis to assess the coverage of its margin model under various market conditions using historical data from realised stressed market conditions and hypothetical data for unrealised stressed market conditions; |
| (b) | use a wide range of parameters and assumptions to capture a variety of historical and hypothetical conditions, including the most-volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices of contracts cleared by the central counterparty, in order to understand how the level of margin coverage might be affected by highly stressed market conditions and changes in important model parameters; |
| (c) | ensure that the sensitivity analysis be performed on a number of actual and representative clearing member portfolios; |
| (d) | ensure that the representative portfolios be chosen based on their sensitivity to the material risk factors and correlations to which the central counterparty is exposed; |
| (e) | ensure that the sensitivity testing and analysis are designed to test the key parameters and assumptions of the initial margin model at a number of confidence intervals to determine the sensitivity of the system to errors in the calibration of such parameters and assumptions; |
| (f) | ensure that appropriate consideration is given to the term structure of the risk factors, and the assumed correlation between risk factors; |
| (g) | evaluate the potential losses in clearing member positions; |
| (h) | where applicable, consider parameters reflective of the simultaneous default of clearing members that issue securities cleared by the central counterparty or the underlying of derivative instruments cleared by the central counterparty; |
| (i) | where applicable, consider the effects of a client’s default that issues securities cleared by the central counterparty or the underlying of derivative instruments cleared by the central counterparty; |
| (j) | periodically report its sensitivity testing results and analysis in a form that does not breach confidentiality to the risk committee in order to seek its advice in the review of its margin model; |
| (k) | define the procedures to detail the actions it could take given the results of sensitivity testing analysis. |
