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.