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.