Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties40.5 Stress testing40.5.1 Stress testing - Risk factors to test |
| (1) | A central counterparty must identify, and have an appropriate method for measuring, relevant risk factors specific to the contracts it clears that could affect its losses. |
| (2) | A central counterparty’s stress tests must take into account risk factors specified for the following type of securities, where applicable— |
| (a) | factors for interest rate related contracts are: |
| (i) | risk factors corresponding to interest rates in each currency in which the central counterparty clears securities; |
| (ii) | the yield curve modelling must be divided into various maturity segments in order to capture variation in the volatility of rates along the yield curve; |
| (iii) | the number of related risk factors must depend on the complexity of the interest rate contracts cleared by the central counterparty; |
| (iv) | basis risk, arising from less than perfectly correlated movements between government and other fixed-income interest rates, must be captured separately; |
| (b) | exchange rate related contracts: risk factors corresponding to each foreign currency in which the central counterparty clears securities and to the exchange rate between the currency in which margin calls are made and the currency in which the central counterparty clears securities; |
| (c) | equity related contracts: risk factors corresponding to the volatility of individual equity issues for each of the markets cleared by the central counterparty and to the volatility of various sectors of the overall equity market. The sophistication and nature of the modelling technique for a given market must correspond to the central counterparty’s exposure to the overall market as well as its concentration in individual equity issues in that market; |
| (d) | commodity contracts: risk factors that take into account the different categories and sub-categories of commodity contracts and related derivative instruments cleared by the central counterparty, including, where appropriate, variations in the convenience yield between derivatives positions and cash positions in the commodity; |
| (e) | credit related contracts: risk factors that consider jump to default risk, including the cumulative risk arising from multiple defaults, basis risk and recovery rate volatility. |
| (3) | A central counterparty must also, at least, give appropriate consideration to the following in its stress tests— |
| (a) | correlations, including those between identified risk factors and similar contracts cleared by the central counterparty; |
| (b) | factors corresponding to the implied and historical volatility of the contract being cleared; |
| (c) | specific characteristics of any new contracts to be cleared by the central counterparty; |
| (d) | concentration risk, including to a clearing member, and group entities of clearing members; |
| (e) | interdependencies and multiple relationships; |
| (f) | relevant risks including foreign exchange risk; |
| (g) | set exposure limits; |
| (h) | wrong-way risk. |