4.1.1. Admission to clearing rules

(1) An Authorised Clearing House must have clear and objective criteria included in its rules according to which Investments can be cleared or settled on its facilities.

(2) In the case of a Commodity Derivative contract, an Authorised Cleaning House must have regard to:

(a) the degree of standardisation of the contractual terms and operational processes of the Commodity Derivative contract;

(b) the volume and liquidity of the Commodity Derivative contract; and

(c) the availability of fair, reliable and generally accepted pricing information in the Commodity Derivative contract

4.2.1. Risk management framework

(1) An Authorised Clearing House must have a comprehensive risk management framework (i.e. detailed policies, procedures and systems) capable of managing legal, credit, liquidity, operational and other risks to which it is exposed.

(2) The risk management framework in (1) must:

• (a) encompass a regular review of material risks to which the Clearing House is exposed and the risks posed to other market participants resulting from its operations; and
• (b) be subject to periodic review by its board as appropriate to ensure that it is effective and operating as intended.

4.2.2. Safeguards for investors

An Authorised Clearing House must ensure that:

• (a) access to its facilities is subject to criteria designed to protect the orderly functioning of those facilities and the interests of investors;
• (b) its clearing services involve satisfactory arrangements for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions in respect of which it provides such services (being rights and liabilities in relation to those transactions);
• (c) satisfactory arrangements are made for recording transactions which are cleared or to be cleared by means of its facilities; and
• (d) appropriate measures are adopted to reduce the extent to which the clearing house's facilities can be used for a purpose connected with market abuse or Financial Crime, and to facilitate their detection and monitor their incidence.

4.2.3. Loss allocation

An Authorised Clearing House must maintain effective arrangements (which may include rules) for ensuring that losses that:

• (a) arise otherwise than as a result of a default of a Member of the Authorised Clearing House; and
• (b) threaten the Authorised Clearing House’s solvency; are allocated with a view to ensuring that the Authorised Clearing House can continue to provide its activities.

4.3.1. Credit Risk

(1) An Authorised Clearing House must establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing and settlement processes.

(2) An Authorised Clearing House operating a payment system or Securities Settlement System must cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources.

(3) An Authorised Clearing House operating as a Central Counterparty must:

• (a) cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources;
• (b) perform stress tests, on a regular basis as appropriate to the nature, scale and complexity of its operations, using models containing standards and predetermined parameters and assumptions; and
• (c) at least monthly (and more frequently if the Securities or Units in a Listed Fund cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by its participants increase significantly), carry out a comprehensive and thorough analysis of stress testing models, scenarios, and underlying parameters and assumptions used to ensure that they are appropriate for determining the required level of default protection in light of current and evolving market conditions; and
• (d) at least annually, conduct an independent review and validation of its financial risk management models.

4.3.2. Collateral

(1) An Authorised Clearing House which requires collateral to manage its own, its Members’ or other participants’ credit risks arising in the course of or for the purposes of its payment, clearing, and settlement processes must:

• (a) only accept collateral with low credit, liquidity, and market risks; and
• (b) set and enforce appropriately conservative haircuts and concentration limits.

(2) An Authorised Clearing House must, for the purposes of meeting the requirement in (1), establish and implement a collateral management system that is well designed and operationally flexible. Such a system must, at a minimum:

• (a) limit the assets it accepts as collateral to those with low credit, liquidity, and market risks;
• (b) establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions;
• (c) to reduce the need for procyclical adjustments, establish, to the extent practicable and prudent, stable and conservative haircuts that are calibrated to include periods of stressed market conditions;
• (d) avoid concentrated holdings of certain assets where that would significantly impair the ability to liquidate such assets quickly without significant adverse price effects; and
• (e) mitigate, if it accepts cross-border collateral, the risks associated with such use. Such measures must ensure that the collateral can be used in a timely manner.

4.3.3. Margin

An Authorised Clearing House operating as a Central Counterparty must:

• (a) have a margin system which establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves;
• (b) use a reliable source of timely price data for its margin system;
• (c) have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable;
• (d) adopt initial margin models and parameters that are risk-based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default;
• (e) mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures;
• (f) ensure that it has the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants;
• (g) analyse and monitor its model performance and overall margin coverage by conducting rigorous daily back testing and at least monthly, and more frequent where appropriate, sensitivity analysis; and
• (h) regularly review and validate its margin system.

4.3.4. Liquidity Risk

(1) An Authorised Clearing House must:

• (a) have a robust framework to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities;
• (b) have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity;
• (c) regularly test the sufficiency of its liquid resources through rigorous stress testing; and
• (d) establish explicit rules and procedures that enable the Authorised Clearing House to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants.

(2) An Authorised Clearing House operating a payment system or Securities Settlement System must maintain sufficient liquid resources in all relevant currencies to effect same-day settlement, and where appropriate intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.

(3) An Authorised Clearing House operating as a Central Counterparty must maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the two largest aggregate payment obligations to the Authorised Clearing House in extreme but plausible market conditions.

4.4.1. Settlement finality

(1) An Authorised Clearing House must have rules and procedures which clearly define:

1. (a) the point at which settlement is final according to the relevant governing law; and
2. (b) the point after which unsettled payments, transfer instructions, or other obligations may not be cancelled by a participant.

(2) An Authorised Clearing House must complete final settlement no later than the end of the value date.

(3)  Notwithstanding (1) above, a settlement by an Authorised Clearing House is final, irrevocable and binding and may not under any circumstances be reversed or avoided after:

1. (a) an amount of money is credited to or debited from a depository account; or
2. (b) an Investment approved for admission to the depository is credited to or debited from a depository account.

(4) Notwithstanding (1) above, transfer instructions and settlement are legally enforceable and, even in the event of insolvency proceedings against a participant, shall be binding on third parties, provided that transfer instructions were entered into a system before the moment of opening of such insolvency proceedings. Where, exceptionally, transfer instructions are entered into a system after the moment of opening of insolvency proceedings and are carried out on the day of opening of such proceedings, they shall be legally enforceable and binding on third parties only if, after the time of settlement, the Authorised Clearing House can prove that it was not aware, nor should have been aware, of the opening of such proceedings.

(5) For the purpose of (4), the moment of opening of insolvency proceedings shall be the moment when the relevant judicial or administrative authority handed down its decision.

4.4.2. Money settlement

(1) Where practical, an Authorised Clearing House must conduct its money settlements in central bank money.

(2) Where a Clearing House conducts its money settlements using commercial bank money, it must:

• (a) adopt appropriate measures to minimise and strictly control the credit and liquidity risk arising from such use;
• (b) ensure that its legal agreements with any settlement banks, at a minimum:
• (i) specify clearly when transfers on the books of individual settlement banks are expected to occur and when they are final; and
• (ii) ensure that funds received are transferable as soon as possible, if not intra-day, at least before the end of the payments day to enable it and its Members and other participants on its facilities to manage their credit and liquidity risks.

4.4.3. Physical delivery

(1) An Authorised Clearing House must:

(a) have rules and procedures which clearly state its obligations with respect to the delivery of physical instruments or commodities; and

(b) identify, monitor, and manage the risks and costs associated with the storage and delivery of physical instruments or commodities.

(2) A Clearing House must have adequate arrangements, including service agreements, which enable it to meet its physical delivery obligations.

Guidance

1. Where an Authorised Clearing House matches participants that have delivery and receipt obligations, the Authorised Clearing House would not need to be involved with the physical storage and delivery process but it should monitor the participants' performance and to the extent practicable, ensure the participants have the necessary systems and resources to be able to fulfil their physical delivery obligations.

2. The legal obligations for delivery should be clearly expressed in the Clearing Rules, Default Rules, and any related agreements, including provisions to specify:

(a) whether the receiving participant should seek compensation from the Authorised Clearing House or the delivering participant in the event of a loss; and

(b) if the Authorised Clearing House holds margin on the matched participants, such margin would only be released when the Authorised Clearing House confirms that both participants have fulfilled their obligations

4.5.1. Central securities depositories

An Authorised Clearing House acting as a Central Securities Depository must:

(1) have appropriate rules, procedures, and controls, including robust accounting practices, to safeguard the rights of issuers and holders of Securities, Units in a Listed Fund, Commodity Derivatives, or Environmental Instruments, prevent the unauthorised creation or deletion of Securities, Units in a Listed Fund, Commodity Derivatives, or Environmental Instruments, and conduct periodic and at least daily reconciliation of its records of assets it maintains;

(2) prohibit overdrafts and debit balances in accounts of Securities, Units in a Listed Fund, Commodity Derivatives, or Environmental Instruments;

(3) maintain Securities, Units in a Listed Fund, Commodity Derivatives, or Environmental Instruments in an immobilised or dematerialised form for their transfer by book entry;

(4) protect assets against custody risk through appropriate rules and procedures consistent with its legal framework;

(5) ensure segregation between the Central Securities Depository’s own assets and the securities of its participants and segregation among the securities of participants; and

(6) identify, measure, monitor, and manage its risks from other activities that it may erform.

4.5.2. Central security depository links

(1) A CSD must not establish any link with another CSD (CSD link) unless:

• (a) it has:
• (i) prior to establishing the CSD link, identified and assessed potential risks, for itself and its Members and other participants using its facilities, arising from establishing such a link;
• (ii) adequate systems and controls to effectively monitor and manage, on an on-going basis, risks identified under (a) above; and
• (iii) complied with the requirement in (2); and
• (b) it is satisfied, on reasonable grounds, that the contractual arrangement establishing the CSD link:
• (i) provides to the CSD and its Members and other participants using its facilities adequate protection relating to possible risks arising from using the other CSDs to which it is linked (linked CSDs);
• (ii) in the case of a provisional transfer of securities between the CSD and linked CSDs, ensure intra-day finality by prohibiting the retransfer of securities before the first transfer of securities becomes final;
• (iii) sets out the respective rights and obligations of the CSD and linked CSDs and their respective Members and other participants using their facilities; and
• (iv) in the case of a linked CSD outside the AIFC, sets out clearly the applicable laws that govern each aspect of the CSD’s and the linked CSD’s operations.

(2) The CSD must be able to demonstrate to the AFSA, prior to the establishment of any CSD link, that:

• (a) the link arrangement between the CSD and all linked CSDs, contains adequate mitigants against possible risks taken by the relevant CSDs, including credit, concentration and liquidity risks, as a result of the link arrangement;
• (b) each linked CSD has robust daily reconciliation procedures to ensure that its records are accurate;
• (c) if it or another linked CSD uses an intermediary to operate a link with another CSD, the CSD or the linked CSD has adequate systems and controls to measure, monitor, and manage the additional risks arising from the use of the intermediary;
• (d) to the extent practicable and feasible, linked CSDs provide for Delivery Versus Payment (DVP) settlement of transactions between participants in linked CSDs, and where such settlement is not practicable or feasible, reasons for non-DVP settlement are notified to the AFSA before the link is approved ; and
• (e) where interoperable securities settlement systems and CSDs use a common settlement infrastructure, there are:
• (i) identical moments established for the entry of transfer orders into the system;
• (ii) irrevocable transfer orders; and
• (iii) finality of transfers of securities and cash.

4.5.3. Exchange-of-value settlement systems

An Authorised Clearing House operating an exchange-of-value settlement system must eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the Authorised Clearing House settles on a gross or net basis and when finality occurs

4.6.1. Default rules in respect of Market Contracts

(1) An Authorised Clearing House must have Default Rules which, in the event of a Member of the Authorised Clearing House being or appearing to be unable to meet his obligations in respect of one or more Market Contracts, enable action to be taken to close out his position in relation to all unsettled Market Contracts to which he is a party.

(2) The rules may authorise the taking of the same or similar action where a Member appears to be likely to become unable to meet his obligations in respect of one or more Market Contracts.

(3) If an Authorised Clearing House has arrangements for transacting business with, or in relation to common Members of, another Authorised Market Institution, it must have Default Rules which enable action to be taken in respect of unsettled Market Contracts to which that Authorised Market Institution is a party in the event of the Authorised Market Institution being or appearing to be unable to meet its obligations in respect of one or more Market Contracts.

Guidance

The AIFC Insolvency Rules contain provisions which protect action taken by an Authorised Clearing House under its Default Rules from the normal operation of insolvency law which might otherwise leave this action open to challenge by a relevant office-holder.

4.6.2. Content of Default Rules

The Default Rules of an Authorised Clearing House must clearly define and specify:

1. (a) circumstances which constitute a default, addressing both financial and operational default, and how the different types of default may be treated by the Authorised Clearing House;
2. (b) the method for identifying a default (including any automatic or discretionary default scenarios, and how the discretion is exercised in any discretionary default scenarios);
3. (c) potential changes to the normal settlement practices in a default scenario;
4. (d) the management of transactions at different stages of processing;
5. (e) the expected treatment of proprietary and client transactions and accounts;
6. (f) the probable sequencing of actions that the Authorised Clearing House may take;
7. (g) the roles, obligations and responsibilities of various parties, including the Authorised Clearing House, the defaulting Member and non defaulting participants;
8. (h) how to address the defaulting Member's obligations to clients;
9. (i) how to address the allocation of any credit losses it may face as a result of any individual or combined default among its participants with respect to their obligations to the Authorised Clearing House and how stress events are dealt with; and
10. (j) any other mechanisms that may be activated to contain the impact of a default, including:
11. (i) a default contribution fund, whereby defaulting and non‐defaulting Members or participants' pre‐funded contributions to the default contribution fund are applied to cover the losses or shortfall arising on a default on the basis of a predetermined order of priority; and
12. (ii) a resolution regime of the defaulting participant, involving "porting"; or
13. (iii) transferring the open positions and margin related to client transactions to a non‐defaulting participant, receiver, third party or bridge financial company; and
14. (k) for all remaining rights and liabilities of the defaulter under or in respect of unsettled Market Contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the rules, by offsetting all relevant rights, assets and liabilities on the relevant account; and
15. (l) for the certification by or on behalf of the Authorised Clearing House of the sum finally payable or, as the case may be, of the fact that no sum is payable, separately for each account of the defaulter; and
16. (m) the Authorised Clearing House's segregation and portability arrangements, including the method for determining the value at which client positions will be transferred; and
17. (n) provisions ensuring that losses that arise as a result of the default of a Member of the Authorised Clearing House or threaten the Authorised Clearing House's solvency are allocated with a view to ensuring that the Authorised Clearing House can continue to provide the services and carry on the activities specified in its recognition order.

4.6.3. Notification to other parties affected

An Authorised Clearing House must have adequate arrangements for ensuring that parties to unsettled Market Contracts with a defaulter are notified as soon as reasonably practicable of the default and of any decision taken under the rules in relation to contracts to which they are a party.

4.6.4. Cooperation with other authorities

An Authorised Clearing House must cooperate, by the sharing of information and otherwise, with the AFSA and any other authority or body having responsibility for any matter arising out of or connected with the default of a Member of the Authorised Clearing House or the default of another Authorised Clearing House or an Authorised Investment Exchange.

4.6.5. Margin

• (a) The rules of an Authorised Clearing House must provide that in the event of a default, margin provided by the defaulter for his own account is not to be applied to meet a shortfall on a client account other than a client account of the defaulter.
• (b) This rule is without prejudice to the requirements of any rules relating to clients’ money made by the AFSA.
• (c) For the purposes of this rule, “client account of the defaulter” means an account held by the Authorised Clearing House in the name of the defaulter in which transactions effected by the defaulter have been recorded.

4.6.6. Segregation

(1) An Authorised Clearing House acting as a Central Counterparty must have systems and procedures to enable segregation and portability of positions of the customers of its Members and other participants on its facilities, and any collateral provided to it with respect to those positions.

(2) For the purposes of (1), an Authorised Clearing House’s systems and controls must, at a minimum, provide for the following:

• (a) the segregation and portability arrangements that effectively protect the positions and related collateral of the customers of the Members or other participants on its facilities from the default or insolvency of the relevant Member or other participants;
• (b) if the Authorised Clearing House offers additional protection of the customer positions and related collateral against the concurrent default of both the relevant Member or other participants or other customers, the adoption of necessary measures to ensure that the additional protection offered is effective; and
• (c) the use of account structures that enable the Authorised Clearing House to readily identify positions of the customers of the relevant Member or other participant, and to segregate their related collateral.

(3) An Authorised Clearing House acting as a Central Counterparty must make available to its Members and other participants using its facilities, its rules, policies and procedures relating to the segregation and portability of the positions and related collateral of the customers of its Members and other participants using its facilities.