A licensed central counterparty must—
| (a) | regularly review the models and parameters adopted to calculate its margin requirements, default fund contributions, collateral requirements and other risk control mechanisms; |
| (b) | subject the models to rigorous and frequent stress tests to assess their resilience in extreme but plausible market conditions and perform back tests to assess the reliability of the methodology adopted; |
| (c) | regularly test the key aspects of its default procedures and take all reasonable steps to ensure that all clearing members understand them and have appropriate arrangements in place to respond to a default event; |
| (d) | publicly disclose key information on its risk management framework and assumptions adopted to perform the stress tests referred to in paragraph (b); and |
| (e) | in conducting stress testing, consider a wide range of relevant scenarios, which must— |
| (aa) | relevant peak historic price volatilities; |
| (bb) | shifts in other market factors such as price determinants and yield curves; |
| (cc) | multiple defaults over various time horizons, simultaneous pressures in funding and asset markets; and |
| (dd) | a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions; |
| (ii) | take into account the design and operation of the central counterparty; |
| (iii) | include all entities that might pose material liquidity risks to the central counterparty; and |
| (iv) | where appropriate, cover a multiday period. |
40.1 Model Validation
40.2 Testing programmes
40.3 Back testing
40.4 Sensitivity testing and analysis
40.5 Stress testing
40.6 Maintaining sufficient coverage
40.7 Review of models using test results
40.8 Reverse stress tests
40.9 Testing default procedures
40.10 Frequency
40.11 Time horizons used when performing tests
40.12 Information to be publicly disclosed
