Financial Markets Act, 2012 (Act No. 19 of 2012)RegulationsFinancial Markets Act RegulationsChapter VI : Central Counterparties41. Interoperability arrangements41.4 Consideration by the Authority |
| (1) | In assessing whether the interoperability arrangement is clearly defined, transparent, valid and enforceable in all relevant jurisdictions, the Authority must take into account— |
| (a) | whether the interoperability arrangement— |
| (i) | clearly identifies, in a form that is binding, the rights and obligations of the central counterparties under the interoperability arrangement; |
| (ii) | is compatible with the risk mitigation processes of the central counterparty; |
| (iii) | establishes a process for regular review of the documentation, which ensures that the documentation remains appropriate and defines the responsibilities of the central counterparties in that process; |
| (iv) | establishes a process to consult the risk committee and the clearing members where the establishment of, or any change to, the interoperability arrangement is likely to have a material impact on the risks to which the central counterparty is exposed, and to inform the clearing members where the establishment of, or any change to, the interoperability arrangement may have an impact on their operations; |
| (v) | clearly indicates the process and the persons responsible for monitoring and ensuring the functioning of the interoperability arrangement; |
| (vi) | clearly indicates the dispute resolution mechanism for disputes arising from the interoperability arrangement; |
| (vii) | clearly defines the conditions and procedure for the termination of the interoperability arrangement; and |
| (b) | whether the central counterparty has— |
| (i) | assessed whether the netting arrangements between the interoperating central counterparties are valid and enforceable; |
| (ii) | assessed whether its rules and procedures concerning the moment of entry of transfer orders into its systems and the moment of irrevocability have been defined in accordance with Regulation 41.1(2); |
| (iii) | assessed the potential for cross-border legal issues to arise as a result of its participation in the interoperability arrangement, in particular with regard to its default procedures and the enforceability of collateral arrangements; |
| (iv) | assessed whether its procedures for the management of the default of the interoperable central counterparty are valid and enforceable; |
| (v) | conducted adequate due diligence to ensure there is a high degree of certainty regarding the enforceability of its default rules against the interoperable central counterparties and regarding the viability of its interoperability procedures. |
| (2) | The Authority must assess whether the interoperability arrangement ensures fair and open access and that denial or restrictions on entering into an interoperability arrangement are based only on risk grounds, and for this purpose the Authority must take into account whether the interoperability arrangement does not— |
| (a) | contain any provision that restricts or creates obstacles for the establishment or future extension of the interoperability arrangement to other central counterparties, other than on duly justified risk grounds; |
| (b) | unduly restrict the termination of the interoperability arrangement where one of the interoperating central counterparties considers it necessary to terminate it on duly justified risk grounds. In such circumstances, the central counterparty deciding to terminate the interoperability arrangement needs to provide adequate justification to the Authority of its reasons to terminate the arrangement. |
| (3) | The Authority must assess whether a central counterparty, before entering into an interoperability arrangement and on an on-going basis, has put in place a general framework to identify, monitor and manage the potential risks arising from the interoperability arrangement, and for this purpose take into account the following: |
| (a) | whether the central counterparty has general policies, procedures and systems, which provide that— |
| (i) | the interoperability arrangement does not impact on the compliance by the central counterparties participating in the arrangement with the requirements to which they are subject under these Regulations or equivalent foreign country regulations; |
| (ii) | the central counterparty has comprehensive information on the operations of the interoperating central counterparties, including the potential reliance on third parties as critical service providers, enabling the central counterparty to perform effective periodic assessments of the risks associated with the interoperability arrangement; |
| (iii) | the central counterparty identifies, monitors, assesses and mitigates any new or increased risk, interdependencies or spill-over effects that may arise from the interoperability arrangement; |
| (iv) | there is a process for agreeing between the interoperable central counterparties any changes to the interoperability arrangement and for resolving disputes; |
| (v) | there is a process for— |
| (aa) | informing the interoperable central counterparties of any change to the rules of the central counterparty; and |
| (bb) | agreeing between the interoperable central counterparties any proposed changes to the rules of one central counterparty that directly impact the interoperability arrangement; |
| (vi) | where interoperability arrangements involve more than two central counterparties, the central counterparty identifies, monitors, assess and mitigate the risks arising from the collective arrangements and the rights and obligations of the different interoperable central counterparties; |
| (vii) | there is a process for the regular review of the central counterparty’s risk management framework for identifying, monitoring, assessing and mitigating risks arising from the interoperability arrangement, including interdependencies or spill-over effects; |
| (viii) | there is a process for the interoperable central counterparties to assess the need for harmonisation of their respective risk management frameworks and that such processes should be approved by the controlling body of the central counterparties; |
| (ix) | the central counterparty’s operational arrangements, processing capacity and risk management arrangements are sufficiently scalable and reliable for both the current and projected peak volumes of activity processed through the interoperable link and the number of central counterparties involved in the interoperability arrangement; |
| (x) | the communication arrangements between the interoperable central counterparties ensure timely, reliable and secure communication; |
| (xi) | the central counterparty’s default management procedures are designed to ensure that the default of one clearing member of one central counterparty does not affect the operations of the interoperable central counterparties or expose them to additional risks; |
| (xii) | the central counterparty has assessed the need for specific default management procedures in view of the interoperability arrangement; and |
| (xiii) | the procedure for the termination of the interoperability arrangement by any of the interoperable central counterparties is clear and transparent and will result in implementation in an orderly manner that does not unduly expose the interoperable central counterparties to additional risks; |
| (b) | whether the central counterparty has prudential requirements to ensure that— |
| (i) | financial risks, including custody risks, arising from the interoperability arrangement are identified, monitored, assessed and mitigated with the same rigour as the central counterparty’s exposures arising from its clearing members; |
| (ii) | the central counterparty has adequate processes, procedures and risk models, including methodologies for stress testing, to adequately forecast its financial exposures and liquidity needs arising from the interoperability arrangement and to ensure that it is adequately covered for current and potential future credit and liquidity exposures arising from the interoperable central counterparties; |
| (iii) | the central counterparty has assessed the required inter-central counterparty resources necessary to cover credit and liquidity risk arising from the interoperability arrangement, including in extreme but plausible market conditions; |
| (iv) | the central counterparty has identified any risks arising from the interval between inter-central counterparty margin calls and the availability of the relevant collateral; |
| (v) | the resources exchanged between interoperable central counterparties do not include contributions to the respective default funds or other financial resources as defined in Regulation 36; |
| (c) | whether the central counterparty has assessed the potential effects of an interoperable central counterparty’s default, including— |
| (i) | the central counterparty’s potential exposures arising from uncovered credit losses if an interoperable central counterparty’s default waterfall has been exhausted; |
| (ii) | the degree to which the portability of positions and a dedicated default fund of the interoperable central counterparty would contribute to the lowering of the inter-central counterparty’s exposures; |
| (iii) | ensuring that risks introduced by the interoperability arrangement are disclosed to the clearing members; |
| (iv) | where more than two central counterparties participate in an interoperability agreement, the additional complexity of such contagion risks; and |
| (v) | the likely liquidity needs resulting from the interoperability arrangement such as in the case of an inter-central counterparty margin call not being met. |
| (d) | whether the central counterparty has a process for regularly assessing differences between the risk-management models and membership controls of the interoperating central counterparties and the risks that may arise from the use of such different models or controls, including assessment of the results of stress tests and the testing of default procedures, and has arrangements in place for mitigating those risks; |
| (e) | the risk profile and membership criteria of each central counterparty, and whether the central counterparty— |
| (i) | has assessed the risk profile of each interoperating central counterparty, including its membership policies, to ascertain that they do not result in a weakening of the central counterparty’s overall risk management framework, in the context of the interoperability arrangement; |
| (ii) | has policies, procedures and systems to constantly monitor, assess and mitigate any risk arising from interdependencies, including from entities or groups of entities acting as clearing members or providers of essential services to one or more interoperable central counterparties; |
| (iii) | has reviewed the concentration limits established by each central counterparty to ensure they remain appropriate in light of the interoperability arrangement; |
| (f) | exposure management, which must provide that the central counterparty— |
| (i) | has identified how it will cover exposures originating from the interoperability arrangement, including: |
| (aa) | how it will calculate margin pursuant to Regulation 33; |
| (bb) | how it will meet exposures following the default of an interoperable central counterparty without reducing the central counterparty’s ability to fulfil its obligations to its own clearing members; |
| (cc) | the assumptions for the determination and exchange of inter-central counterparty’s margins. This should include a detailed explanation to the Authority of the differences, if any, between the risk management parameters applied to the inter-central counterparty exposures as opposed to the ones applied to the clearing members. |
| (ii) | has put in place risk management tools, such as margin or default fund policies, to address any weakening of the central counterparty’s overall risk management framework due to the interoperability arrangement; |
| (iii) | has put in place arrangements that are transparent to its clearing members, to meet exposures arising from the interoperability arrangement, including in extreme but plausible market conditions. |
| (4) | The Authority must— |
| (a) | assess that an interoperable central counterparty deposits collateral in a way that it is protected from the default of any interoperable central counterparty; |
| (b) | at least take into account that the interoperating central counterparty has undertaken appropriate due diligence to ensure that the collateral: |
| (i) | is deposited in a insolvency remote manner, thus it will not be affected by the default of any other interoperable central counterparty; |
| (ii) | will be available in a timely manner when needed. |