MIR 4 MIR 4 RULES APPLICABLE TO RECOGNISED CLEARING HOUSES
MIR 4.1 MIR 4.1 Introduction
This chapter contains additional Recognition Requirements applicable to Recognised Clearing Houses.
The Rules in this Chapter are intended to be consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures. All Recognised Clearing Houses should comply with such principles.
MIR 4.2 MIR 4.2 Capital requirements
MIR 4.2.1A Recognised Clearing House shall hold capital more than or equal to the sum of capital calculated in respect of the following risks:(a) winding down or restructuring activities. Six months' gross operational expenses.(b) operational risks. A Recognised Clearing House shall calculate its capital requirement for operational risks using either the Basic Indicator Approach or, with prior authorisation from the Regulator, the Standardised Approach or the Alternative Standardised Approach, both as provided specifically in Appendix 7.3 and generally in Appendix 7 of PRU.(c) credit, counterparty credit and market risks. A Recognised Clearing House shall calculate its capital requirements as the sum of 10% of its risk‐weighted exposure amounts for credit and counterparty credit risk and its capital requirements for market risk calculated in accordance with Appendix 6 of PRU, subject to the following:(i) For the calculation of the risk‐weighted exposure amounts for credit risk and counterparty credit risk, a Recognised Clearing House shall apply the Credit Risk Capital Requirement (CRCOM) method in Appendix 4.8 of PRU.(ii) Where a Recognised Clearing House does not use its own resources, the Recognised Clearing House shall apply a risk weight of 250% to its exposure stemming from any contributions to the default fund of another Clearing house and a risk weight of 2% to any trade exposures with another Clearing house.(d) business risk. A Recognised Clearing House shall submit to the Regulator for approval its own estimate of the capital necessary to cover losses resulting from business risk based on reasonably foreseeable adverse scenarios relevant to its business model. The capital requirement for business risk shall be equal to the approved estimate and shall be subject to a minimum amount of 25% of its annual gross operational expenses.
For the purposes of Rule 4.2.1, operational expenses shall be considered in accordance with:(a) International Financial Reporting Standards (IFRS);(b) in accordance with generally accepted accounting principles of a third country determined by the Regulator to be equivalent to IFRS; or(c) accounting standards of a third country the use of which is permitted by the Regulator.
Recognised Clearing Houses shall use the most recent audited information from their annual financial statement.
A Recognised Clearing House shall have procedures in place to identify all sources of risks that may impact its on-going functions and shall consider the likelihood of potential adverse effects on its revenues or expenses and its level of capital.
If the amount of capital held by a Recognised Clearing House is lower than 110% of the capital requirements or lower than 110% of USD 9.5 million (the "notification threshold"), the Recognised Clearing House shall immediately notify the Regulator in writing of the information set out in Rule 5.4.1 and keep it updated at least weekly, until the amount of capital held by the Recognised Clearing House returns above the notification threshold.
MIR 4.3 MIR 4.3 Clearing and settlement
A Recognised Clearing House must be able to demonstrate compliance with internationally accepted standards for financial market infrastructures to the satisfaction of the Regulator.
A Recognised Clearing House must ensure that its Clearing Services include satisfactory arrangements for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions for which it provides such services.
MIR 4.3.3In determining whether there are satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions, the Regulator may have regard to the Recognised Clearing House's:(a) rules and practices relating to Clearing and settlement including its arrangements with another Person for the provision of Clearing and settlement services;(b) arrangements for matching trades and ensuring that the parties are in agreement about trade details;(c) where relevant, arrangements for making deliveries and payments, in all relevant jurisdictions;(d) procedures to detect and deal with the failure of a Member to settle in accordance with its rules;(e) arrangements for taking action to settle a trade if a Member does not settle in accordance with its rules;(f) arrangements for monitoring its Members' settlement performance; and(g) (where appropriate) Default Rules and default procedures.
A Recognised Clearing House will not be regarded as failing to comply with the Recognition Requirement merely because it is unable to arrange for a specific transaction to be settled.
In determining whether there are satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions, the Regulator may have regard to the Recognised Clearing House's:(a) rules and practices relating to Clearing and settlement including its arrangements with another Person for the provision of Clearing and settlement services;(b) arrangements for matching trades and ensuring that the parties are in agreement about trade details;(c) where relevant, arrangements for making deliveries and payments, in all relevant jurisdictions;(d) procedures to detect and deal with the failure of a Member to settle in accordance with its rules;(e) arrangements for taking action to settle a trade if a Member does not settle in accordance with its rules;(f) arrangements for monitoring its Members' settlement performance; and(g) (where appropriate) Default Rules and default procedures.
A Recognised Clearing House will not be regarded as failing to comply with the Recognition Requirement merely because it is unable to arrange for a specific transaction to be settled.
MIR 4.4 MIR 4.4 Admission of Financial Instruments to Clearing – investment criteria
A Recognised Clearing House must have clear and objective criteria ("Investment Criteria") included in its Business Rules according to which Financial Instruments can be cleared and settled on its facilities. The Investment Criteria must include the requirements in Rule 4.4.2(a) and (b) below as relevant.
MIR 4.4.2A Recognised Clearing House must ensure that Financial Instruments are cleared on its facilities only if:(a) in the case of Securities, such Securities are either:(i) admitted to the Official List of Securities; or(ii) admitted to trading on a Recognised Investment Exchange, Remote Investment Exchange, or a market in a jurisdiction acceptable to the Regulator; and(b) in the case of Derivative contracts, are traded on a Recognised Investment Exchange, Remote Investment Exchange, or a market in a jurisdiction acceptable to the Regulator, having regard to:(i) the degree of standardisation of the contractual terms and operational processes of the Derivative contract;(ii) the volume and liquidity of the Derivative contract; and(iii) the availability of fair, reliable and generally accepted pricing information in the Derivative contract.
MIR 4.5 MIR 4.5 Default Rules
MIR 4.5.1 [Deleted]
A Recognised Clearing House must have clear and fair Business Rules which are legally binding and enforceable against its Members, published and made freely available. Such rules must include:(a) criteria governing the admission of Members and any other Persons to whom access to its facilities is provided;(b) criteria governing the admission of investments to trading, or Clearing and settlement, as appropriate to its facilities;(c) Default Rules; and(d) any other matters necessary for the proper functioning of the Recognised Clearing House and the facilities operated by it.
MIR 4.5.2 [Deleted]
A Recognised Clearing House's Business Rules must:(a) be based on objective criteria and not be discriminatory;(b) set out the design and operation of the relevant systems;(c) set out the Members' and other participants' obligations (including fees and materials costs):(i) arising from the Recognised Clearing House's constitution and other administrative arrangements;(ii) when undertaking transactions on its facilities; and(iii) relating to professional standards that must be imposed on staff and agents of the Members and other participants when undertaking transactions on its facilities;(d) set out the risk for Members and other participants when accessing and participating in such facilities;(e) contain provisions for the resolution of Members' and other participants' disputes and an appeal process from the decisions of the Recognised Clearing House; and(f) contain disciplinary proceedings, including any sanctions that may be imposed by the Recognised Clearing House against its Members and other participants.
A Recognised Clearing House which provides central counterparty, clearing or settlement facilities must make transparent and non‐discriminatory rules based on objective criteria, governing access to those facilities. A Recognised Body may refuse access to these facilities on legitimate commercial grounds.
A Recognised Clearing House must have legally enforceable Default Rules which, in the event of a Member (including if a Member is another Recognised Clearing House or a Recognised Investment Exchange) being, or appearing to be, unable to meet his obligations in respect of one or more market contracts, enable action to be taken in respect of unsettled market contracts to which the Member is a party, where appropriate to the risks faced by it, including:(a) effecting any transfers and close-outs of a defaulting Member or participant's assets or proprietary or client positions (as applicable) to the Recognised Clearing House, a non-defaulting Member or participant, and/or to a receiver, third party or bridge financial company;(b) the auction of any position or asset of the defaulting Member or participant in the market;(c) the application the proceeds of liquidation, and other funds and assets of the defaulting Member or participant; and/or(d) the use of a default contribution fund mechanism whereby defaulting and non-defaulting Member or participant's pre-funded contributions to the default contribution fund are applied to cover the obligation.
MIR 4.5.5The Default Rules shall clearly define and specify:(a) circumstances which constitute a default, addressing both financial and operational default, and how the different types of default may be treated by the Recognised Clearing House;(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);(c) potential changes to the normal settlement practices in a default scenario;(d) the management of transactions at different stages of processing;(e) the expected treatment of proprietary and Client transactions and accounts;(f) the probable sequencing of actions that the Recognised Clearing House may take;(g) the roles, obligations and responsibilities of various parties, including the Recognised Clearing House, the defaulting Member and non‐defaulting participants;(h) how to address the defaulting Member's obligations to Clients;(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 Recognised Clearing House and how stress events are dealt with; and(j) any other mechanisms that may be activated to contain the impact of a default, including:(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(ii) a resolution regime of the defaulting participant, involving "porting" or transferring the open positions and margin related to Client transactions to a non‐defaulting participant, receiver, third party or bridge financial company;(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 Default Rules, by offsetting all relevant rights, assets and liabilities on the relevant account;(l) for the certification by or on behalf of the Recognised 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;(m) the Recognised Clearing House's segregation and portability arrangements, including the method for determining the value at which Client positions will be transferred; and(n) provisions ensuring that losses that arise as a result of the default of a Member of the Recognised Clearing House or threaten the Recognised Clearing House's solvency are allocated with a view to ensuring that the Recognised Clearing House can continue to provide the services and carry on the activities specified in its Recognition Order.
Default Rules should be reviewed and tested at least annually or following material changes to the rules and procedures to ensure that they are practical and effective.
A Recognised Clearing House must have adequate compliance procedures in place to ensure that:(a) its Business Rules and Default Rules are monitored and enforced;(b) any complaints relating to its operations or regarding Members and other participants on its facilities are promptly investigated;(c) where appropriate, disciplinary action resulting in financial and other types of penalties can be taken;(d) appeal procedures are in place; and(e) referrals can be made to the Regulator in appropriate circumstances.
The Default Rules may make the same or similar provision, in relation to Designated Non‐Members designated in accordance with the procedures mentioned in Rule 4.5.9, as in relation to Members of the Recognised Clearing House.
If such provision is made as allowed under Rule 4.5.8, the Recognised Clearing House must have adequate procedures for:(a) designating the Persons, or descriptions of person, in respect of whom action may be taken;(b) keeping under review the question which Persons or descriptions of person should be or remain so designated; and(c) withdrawing such designation.
The procedures in Rule 4.5.9 must be designed to secure that:(a) a Person is not, or does not remain, designated if failure by him to meet his obligations in respect of one or more Market Contracts would adversely affect the operation of the market; and(b) a description of persons is not, or does not remain, designated if failure by a Person of that description to meet his obligations in respect of one or more Market Contracts would affect operation of the market.
MIR 4.5.11The Recognised Body must have adequate arrangements:(a) for bringing a designation or withdrawal of designation to the attention of the Person or description of persons concerned; and(b) where a description of Persons is designated, or the designation of a description of persons is withdrawn, for ascertaining which Persons fall within that description.
MIR 4.6 MIR 4.6 Stress testing of capital
A Recognised Clearing House should adopt comprehensive and stringent measures to ensure that it has adequate total financial resources to effectively manage its credit risk and exposures.
A Recognised Clearing House should determine the amount of the total financial resources available to it and regularly test the sufficiency of such amount, particularly in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing.
In conducting stress testing, a Recognised Clearing House should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters' positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions.
A Recognised Clearing House which is involved in activities with a more-complex risk profile, or is systemically important in multiple jurisdictions, should maintain additional financial resources to cover a wide range of potential stress scenarios. These should include the default of the two of its market counterparties (including their affiliates) that would potentially cause the largest aggregate credit exposure for the Recognised Clearing House in extreme but plausible market conditions. In all other cases, a Recognised Clearing House should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios, which include the default of the market counterparty (including its affiliates) that would potentially cause the largest aggregate credit exposure for the Recognised Clearing House in extreme but plausible market conditions.
MIR 4.7 MIR 4.7 Risk management
Risk management framework
A Recognised Clearing House must have a comprehensive risk management framework (i.e. detailed policies, procedures and systems) capable of managing systemic, legal, credit, liquidity, operational and other risks to which it is exposed.
The risk management framework in Rule 4.7.1 must:(a) encompass a regular review of material risks to which the Recognised Clearing House is exposed and the risks posed to other market participants resulting from its operations; and(b) be subject to periodic review as appropriate to ensure that it is effective and operating as intended.
The risk management framework should identify scenarios that may potentially prevent a Recognised Clearing House from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down.
A Recognised Clearing House should prepare appropriate plans for resumption of its operations in such scenarios and, where it is not possible to do so, for an orderly wind- down of the operations of the Recognised Clearing House premised on the results of such assessments. Such procedures should also include appropriate early notification to the Regulator and other regulators as appropriate.
A Recognised Clearing House should, to the extent possible, provide incentives to Members and other market participants to manage and contain the risks they pose to the orderly and efficient operations of the Recognised Clearing House. Those may include financial penalties to Members and other participants that fail to settle Investments in a timely manner or to repay intra-day credit by the end of the operating day.
A Recognised Clearing House shall have in place a well-documented assessment and management system for operational risk with clear responsibilities assigned for this system. It shall identify its exposures to operational risk and track relevant operational risk data, including material loss data. This system shall be subject to regular review carried out by an independent party possessing the necessary knowledge to carry out such review.
An operational risk assessment system shall be closely integrated into the risk management processes of the Recognised Clearing House. Its output shall be an integral part of the process of monitoring and controlling the operational risk profile.
A Recognised Clearing House shall implement a system of reporting to Senior Management that provides operational risk reports to Regulatory Functions within the institutions. A Recognised Clearing House shall have in place procedures for taking appropriate action according to the information within the reports to management.
A Recognised Clearing House must have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
A Recognised Clearing House must have adequate rules and procedures, including contractual arrangements, which are legally enforceable.
A Recognised Clearing House that operates in multiple jurisdictions must:(a) identify and mitigate the risks arising from doing business in the relevant jurisdictions, including those arising from conflicting laws applicable in such jurisdictions; and(b) ensure the arrangements referred to in Rule 4.7.10 provide a high degree of certainty that actions taken by the Recognised Clearing House under its rules and procedures will not be reversed, stayed or rendered void.
MIR 4.7.12A Recognised Clearing House may be conducting its activities in multiple jurisdictions in circumstances such as:(a) where it operates through linked Recognised Clearing Houses in or outside of the Abu Dhabi Global Market, or clearing houses, securities settlement systems, being systems that enable Financial Instruments to be transferred and settled by book entry, or Central Securities Depositories outside of the Abu Dhabi Global Market;(b) where its Members and other participants are incorporated, located, or otherwise conducting business in jurisdictions outside the Abu Dhabi Global Market; or(c) where any collateral provided is located or held in a jurisdiction outside the Abu Dhabi Global Market.
A Recognised Clearing House should be able to demonstrate to the Regulator that the legal basis on which it operates, including in multiple jurisdictions, is well founded. This would general include:(a) well-defined rights and obligations of the Recognised Clearing House, its Members and other users, including its service providers such as custodians and settlement banks, or would provide a mechanism by which such rights and obligations can be ascertained. This would enable the Recognised Clearing House to identify and address risks that arise from its operations involving such parties;(b) adequately addressing legal risks faced by a Recognised Clearing House, particularly where it operates in multiple jurisdictions including a situation where an unexpected application of a law or regulation may render a contract between itself and counterparty void or unenforceable, thereby leading to a loss; and(c) obtaining independent legal opinions as appropriate to its activities in order to form clear views about the legally binding nature of its contractual arrangements in the relevant jurisdictions. Such legal opinions should, to the extent practicable, confirm the enforceability of the rules and procedures of the Recognised Clearing House in the relevant jurisdictions and be made available to the Regulator upon request.
A Recognised Clearing House must establish and implement a robust process to manage:(a) its current and potential future credit and market risk exposures to market counterparties, including Members and other participants on its facilities; and(b) credit risks arising from its payment, Clearing, and settlement processes.
The process referred to in Rule 4.7.14 must:(a) enable a Recognised Clearing House to effectively measure, monitor, and manage its risks and exposures effectively;(b) enable a Recognised Clearing House to identify sources of credit risk and routinely measure and monitor its credit exposures; and(c) use appropriate risk management tools or margin and other prefunded financial resources to control the identified credit risks.
For the purposes of Rule 4.7.14, a Recognised Clearing House must, on a regular basis as appropriate to the nature, scale and complexity of its operations:(a) perform stress tests using models containing standards and predetermined parameters and assumptions; and(b) carry out 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.
A Recognised Clearing House must:(a) undertake the analysis referred to in Rule 4.7.16(b) at least on a two-monthly basis, unless more frequent analysis is warranted because the investments cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by its participants increase significantly;(b) consider carrying out daily stress testing to measure and monitor its risk exposures, especially if its operations are complex or widely spread over multiple jurisdictions; and(c) perform a full validation of its risk-management models at least annually.
A Recognised Clearing House must establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its Members and other participants with respect to any of their obligations to the Recognised Clearing House. Such rules and procedures should:(a) address how any potentially uncovered credit losses would be allocated, including the repayment of any funds the Recognised Clearing House may borrow from its liquidity providers; and(b) indicate the Recognised Clearing House's process to replenish any financial resources that it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
A Recognised Clearing House must document its supporting rationale for, and have appropriate governance arrangements relating to, the amount of total financial resources it maintains.
A Recognised Clearing House must have clear procedures to report the results of its stress tests to its governing body and senior management as appropriate.
A Recognised Clearing House must use the results of its stress tests to evaluate the adequacy of its total financial resources and make any adjustments as appropriate.
A Recognised Clearing House must:(a) determine the amount of its minimum liquid resources;(b) maintain sufficient liquid resources to be able to effect same-day, intra-day or multi-day settlement, as applicable, of its payment obligations with a high degree of confidence under a wide range of potential stress scenarios;(c) ensure that all resources held for the purposes of meeting its minimum liquid resource requirement are available when needed;(d) have a well-documented rationale to support the amount and form of total liquid resources it maintains for the purposes of (b) and (c); and(e) have appropriate arrangements in order to be able to maintain, on an on-going basis, such amount and form of its total liquid resources.
A Recognised Clearing House must have a robust framework for managing its liquidity risks. Such a framework must enable it to manage liquidity risks arising from its Members and other participants on its facilities, and any other involved parties, such as settlement banks, custodian banks, liquidity providers ("Members and other involved parties"). For that purpose, the framework must, at a minimum, include:(a) rules and procedures that:(i) enable the Recognised Clearing House to meet its payment obligations on time following any individual or combined default of its Members and other involved parties;(ii) address unforeseen and potentially uncovered liquidity shortfalls to avoid unwinding, revoking, or delaying the settlement of its payment obligations arising under the same-day, intra-day or multiday settlement obligations, as applicable; and(iii) indicate any liquidity resources the Recognised Clearing House may deploy, in the event of default by a Member or other involved parties, during a stress event to replenish the available liquid resources and the associated process, so that it can continue to operate in a safe and sound manner;(b) effective operational and analytical tools to identify, measure and monitor its settlement and funding flows on an on-going and timely basis; and(c) rigorous due diligence procedures relating to its liquidity providers to obtain a high degree of confidence that each provider (whether the provider is a Member or other participant using its facilities or an external party) has:(i) sufficient information to assess, understand and manage its own liquidity risks; and(ii) the capacity to perform as required under their commitment.
The framework referred to in Rule 4.7.23 must enable the Recognised Clearing House to effectively measure, monitor, and manage its liquidity risk.
To the extent that the rules addressing liquidity risk referred to in Rule 4.7.23 also address credit risks, the same rules, after adjustment as appropriate, can be used for both purposes.
A Recognised Clearing House must regularly:(a) review the adequacy of the amount of its minimum liquid resources as determined in accordance with Rule 4.7.22;(b) test the sufficiency of its liquid resources maintained to meet the relevant amount through rigorous stress testing; and(c) test its procedures for accessing its liquid resources at a liquidity provider.
In conducting stress testing, a Recognised Clearing House should consider:(a) a wide range of relevant scenarios including relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions;(b) the design and operation of the Recognised Clearing House;(c) all entities that may pose material liquidity risks to the Recognised Clearing House (such as settlement banks, custodian banks, liquidity providers, and other involved entities); and(d) where appropriate, for price fluctuations during a multi-day period.
For the purposes of meeting the minimum liquid resource requirement referred to in Rule 4.7.22, a Recognised Clearing House's qualifying liquid assets/resources may include:(a) cash held in appropriate currencies at a central bank in its or other relevant jurisdiction, or at creditworthy commercial banks;(b) committed lines of credit;(c) committed foreign exchange swaps;(d) committed repos; and(e) highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions.
A Recognised Clearing House's access to a routine line of credit made available by a central bank in its or other relevant jurisdiction, to the extent that the Recognised Clearing House has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank must comply with the following to count as liquid assets/resources:(a) a Recognised Clearing House must take account of what collateral is typically accepted by the relevant central bank as such assets may be more likely to be liquid in stressed circumstances, even if the Recognised Clearing House does not have access to a routine line of credit made available by a central bank; and(b) a Recognised Clearing House should not assume the availability of emergency central bank credit as a part of its liquidity plan.
A Recognised Clearing House may supplement its qualifying liquid resources with other forms of liquid resources; and such liquid resources should be in the form of assets that are likely to be saleable, or acceptable as collateral, for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions.
Where a Recognised Clearing House has access to a central bank lines of credit or accounts, payment services, or securities services, it should use those services as far as practicable, as such use is likely to enhance its ability to manage liquidity risk more effectively.
A Recognised Clearing House must have clear procedures to report the results of its stress tests undertaken for the purposes of this Rule to its governing body and senior management as appropriate.
A Recognised Clearing House must use the results of stress testing to evaluate the adequacy of its liquidity risk-management framework and make any appropriate adjustments as needed.
A Recognised Clearing House must record the results of such stress testing and the rationale for any adjustments made to the amount and form of total liquid resources it maintains.
Custody and investment risk
A Recognised Clearing House must have effective means to address risks relating to:(a) custody of its own assets (or banking of its cash), in accordance with Rule 4.7.36; and(b) custody of its Members and other participants' assets in accordance with Rule 4.7.37.
MIR 4.7.36(a) hold its own deposits and custody assets only with entities which have been granted Financial Services Permission by the Regulator or in banks or credit institutions regulated by a non‐Abu Dhabi Global Market Financial Services Regulator considered by the Regulator to be equivalent for such purposes;(b) be able to have prompt access to its deposits and custody assets when required; and(c) regularly evaluate and understand its exposures to entities which hold its assets, including the monitoring of the overall risk exposure to an individual banker or custodian remains within acceptable concentration limits and of the bank or custodian's financial condition on an on‐going basis.
For the purposes of investing its own or its participants' deposits and custody assets, a Recognised Clearing House must ensure that:(a) it has an investment strategy which is consistent with its overall risk-management strategy and is fully disclosed to its Members and other participants using its facilities; and(b) its investments comprise instruments with minimal credit, market, and liquidity risks. For this purpose, the investments may be secured by, or be claims on, high-quality obligors, or the arrangements allow for quick liquidation with little, if any, adverse price effect, or there is no investments in obligors affiliated with or securities issued by the participant.
MIR 4.8 MIR 4.8 Money settlement
Where a Recognised Clearing House conducts its money settlements using commercial bank money, it must adopt appropriate measures to minimise and strictly control the credit and liquidity risk arising from such use.
For the purposes of Rule 4.8.1, a Recognised Clearing House must:(a) conduct its money settlements using only such settlement assets with little or no credit or liquidity risk;(b) monitor, manage, and limit its credit and liquidity risks arising from commercial settlement banks. In particular, it must establish and monitor adherence to strict criteria for the use of settlement banks, which take into account, among other things, the regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability of the relevant settlement banks; and(c) monitor and manage the concentration of credit and liquidity exposures to its commercial settlement banks, including, to the extent such banks are also Members ensure that its legal agreements with such 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;(ii) ensure that funds received are transferable as soon as possible, if not intra-day, at least by the end of the day to enable it and its Members and other participants on its facilities to manage their credit and liquidity risks; and(iii) not permit such banks to combine or offset any right or liability they or their affiliates may have in their capacity as a Clearing Member.
If a Recognised Clearing House does not conduct its money settlement on commercial bank money but on its own books, it should minimise and strictly control its credit and liquidity risks as appropriate.
MIR 4.9 MIR 4.9 Physical delivery
A Recognised Clearing House incurring obligations that require physical delivery of physical instruments or commodities must:(a) provide adequate information to its Members and other participants using its facilities relating to its obligations with respect to physical delivery of the physical instruments or commodities. Such information must also be made publicly available;(b) identify, monitor, and manage the risks associated with such physical deliveries; and(c) identify, monitor, and manage the risks and costs associated with the storage and delivery.
A Recognised Clearing House must have adequate arrangements, including service agreements, which enable it to meet its physical delivery obligations.
Where a Recognised Clearing House matches participants that have delivery and receipt obligations, the Recognised 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:
The legal obligations for delivery should be clearly expressed in the Business Rules, Default Rules, and any related agreements, including provisions to specify, for instance:(a) whether the receiving participant should seek compensation from the Recognised Clearing House or the delivering participant in the event of a loss; and(b) if the Recognised Clearing House holds margin on the matched participants, such margin will only be released until the Recognised Clearing House confirms that both participants have fulfilled their obligations.
MIR 4.10 MIR 4.10 Collateral and margin
A Recognised Clearing House must call and receive collateral to manage its risks arising in the course of or for the purposes of its payment, Clearing, and settlement processes. It must, in the normal course of business, only accept collateral with low credit, liquidity, and market risks.
In some instances, certain types of assets which are not considered to have low credit, liquidity and market risks may be acceptable for credit purposes if the Recognised Clearing House sets and enforces appropriately conservative haircuts and concentration limits and appropriate collateral risk management procedures are put in place by the Recognised Clearing House. A Recognised Clearing House may, in some circumstances, accept the deliverable of a contract as collateral against the contract for exchange.
A Recognised Clearing House must, for the purposes of meeting the requirement in Rule 4.10.1, establish and implement a collateral management system that is well designed and operationally flexible to enable ongoing monitoring and management of collateral. A Recognised Clearing House must also ensure that it is confident of the collateral's value in the event of liquidation and its capacity to use that collateral quickly, especially in stressed market conditions. Such a system must, at a minimum:(a) allow for timely calculation and execution of margin calls, accurate daily reporting of initial and variation margin, and the management of any disputes;(b) track the extent of reuse of collateral by the Recognised Clearing House (both cash and non-cash) and the rights of the Recognised Clearing House to the collateral;(c) accommodate timely deposit, withdrawal, substitution and liquidation of collateral;(d) regularly adjust its requirements for acceptable collateral in accordance with changes in underlying risks;(e) establish prudent valuation practices, including daily marking to market of the Recognised Clearing House's collateral;(f) develop haircuts that are regularly tested, independently validated at least annually and take into account stressed market conditions;(g) reduce the need for procyclical adjustments, by establishing, to the extent practicable and prudent, stable and conservative haircuts that are calibrated to include periods of stressed market conditions;(h) establish concentration limits which are periodically reviewed by the Recognised Clearing House to determine their adequacy or imposing concentration charges to avoid concentrated holdings of certain assets where that would significantly impair the ability to liquidate such assets quickly without significant adverse price effects; and(i) mitigate, if it accepts collateral held in another jurisdiction or governed by non-Abu Dhabi Global Market law, the risks and exposures associated with such use, including considering foreign exchange risk, legal and operational challenges such as differences in operating hours of foreign custodians and central securities depositories and conflicts of law risks. Such measures must ensure that the collateral can be used in a timely manner and should identify and address any significant liquidity effects and legal risks.
If a Recognised Clearing House plans to use assets held as collateral to secure liquidity facilities in the event of a participant default, the Recognised Clearing House must:(a) consider, in determining acceptable collateral, what will be acceptable as security to lenders offering liquidity facilities.(b) measure and monitor the correlation between a counterpart's creditworthiness and the collateral posted; and(c) take measures to mitigate risks, that the collateral would likely lose value in the event that the participant providing the collateral defaults.
The rules of the Recognised Clearing House must set out:(a) collateral and margin requirements and collateral management process, and specify when a Recognised Clearing House may reuse or invest its participants' collateral and the process for returning that collateral to participants; and(b) in the event of a default, that margin provided by the defaulter for any client account is not to be applied to meet a shortfall its own proprietary account.
MIR 4.10.6(a) mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures;(b) have necessary authority and operational capacity to make intra-day margin calls and payments, both scheduled and unscheduled, to participants; and(c) regularly review and validate its margin system to ensure that it operates effectively and as intended.
The margin system of a Recognised Clearing House must, at a minimum:(a) establish margin levels which are commensurate with the risks and particular attributes of each product, portfolio, and market it serves, especially the risk of credit exposures posed by open positions of its Members or other participants using its facilities;(b) use a reliable source of timely price data for its margin system, and also procedures and sound valuation models for addressing circumstances in which pricing data is not readily available or reliable;(c) adopt initial margin models and parameters that are risk-based and generate margin requirements sufficient to cover its potential future exposure to Members and other participants using its facilities in the interval between the last margin collection and the close-out of positions following a participant default;(d) adopt a daily (and where appropriate, intra-day) calculation and collection policy of variation margin based on models and parameters that manages current and potential future exposures; and(e) analyse and review the performance of the margin model and overall margin coverage by:(i) conducting rigorous daily back-testing to evaluate whether there are any exceptions to its initial margin coverage at least monthly, and more frequently as appropriate;(ii) sensitivity analysis to determine the impact of varying important model parameters, including the most-volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices; and(iii) an assessment of the theoretical and empirical properties of its margin model for all products it clears.
The initial margin established pursuant to Rule 4.10.7(c) must:(a) at the Member's portfolio level, be applied in respect of each portfolio's distribution of future exposure. If a Recognised Clearing House uses portfolio margining, it should continuously review and test offsets among products;(b) at more granular levels, meet the corresponding distribution of future exposures; and(c) use models which, among other things:(i) rely on conservative estimates of the time horizons for the effective hedging or close-out of the particular types of products cleared by the Recognised Clearing House, including in stressed market conditions; and(ii) have an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, and, to the extent practicable and prudent, limit the need for destabilising procyclical changes.
A Recognised Clearing House may allow offsets or reductions in required margin across products that it clears or between products that it and another Recognised Clearing House clear, if the risk of one product is significantly and reliably correlated with the risk of the other product.
Where two or more Recognised Clearing Houses are authorised to offer cross-margining, they must have appropriate safeguards and harmonised overall risk-management systems.
MIR 4.11 MIR 4.11 Settlement finality
A Recognised Clearing House must have adequate arrangements to ensure clear and certain final settlement of payments, transfer instructions or other obligations of Members and other participants using its facilities and, where relevant, its own obligations. Where possible, a Recognised Clearing House should provide intra-day or real-time settlement finality to reduce settlement risk.
A Recognised Clearing House's arrangements for final settlement must:(a) ensure that, if intra-day or real-time settlement is not feasible, final settlement (of any payment, transfer instruction, or other obligation that has been submitted to and accepted by a Recognised Clearing House in accordance with its acceptance criteria) occurs at least by the end of the value date of the relevant transaction; and(b) clearly define:(i) the point at which the transfer instruction takes effect as having been entered into the system and when the final settlement occurs;(ii) the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by the parties to the underlying contract; and(c) prohibit the revocation by a Member, participant or other user of a transfer instruction from the point specified in accordance with sub-paragraph (b)(ii).
For the purposes of this Rule:(a) "final settlement" is the irrevocable and unconditional transfer of an asset or Financial Instrument, or the discharge of obligations arising under the underlying contract by the parties to the contract; and(b) "value date" is the day on which the payment, transfer instruction, or other obligation arising under the underlying contract is due and, accordingly, the associated funds or Investments are available to the respective parties under the contract.
MIR 4.12 MIR 4.12 Segregation and portability
MIR 4.12.1A Recognised Clearing House must have systems and procedures to enable segregation and portability of positions of the Clients of its Members and other participants on its facilities, and any collateral provided to it with respect to those positions. Such systems and procedures must enable the Recognised Clearing House to:(a) maintain the Client positions and any related collateral referred to in 4.12.1 in individual Client accounts or in Omnibus Client Accounts; and(b) structure its portability arrangements so that the positions and collateral of a defaulting Member's or other participant's Clients can be transferred to one or more other Members or participants.
A Recognised 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 clients of the Members or other participants on its facilities, from the default or insolvency of the relevant Member or other participants;(b) if the Recognised Clearing House offers additional protection of the client positions and related collateral against the concurrent default of both the relevant Member or other participants or other clients, the adoption of necessary measures to ensure that the additional protection offered is effective; and(c) the use of account structures that enable the Recognised Clearing House to readily identify assets and positions of the clients of the relevant Member or other participant, and to segregate their related collateral.
The requirement to distinguish assets and positions in accounts in 4.12.2(a) is satisfied where:(a) the assets and positions are recorded in separate accounts;(b) the netting and positions recorded on different accounts is prevented; and(c) the assets covering the positions recorded in an account are not exposed to losses connected to positions recorded in another account.
In relation to 4.12.2(a) above, a Recognised Clearing House shall offer to(a) keep separate records and accounts enabling its Members or participants to distinguish in accounts with the Recognised Clearing House its assets and positions from those held for the accounts of its clients ('Omnibus Client Segregation'); or(b) keep separate records and accounts enabling its Members or participants to distinguish in accounts with the Recognised Clearing House the assets and positions held for the account of a specific client from those held for the account of other clients ('Individual Client Segregation'). If requested, the Recognised Clearing House must offer Members or participants the possibility to open more accounts in their own name or for the account of their clients.
A Recognised Clearing House 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 clients of its Members and other participants using its facilities. This includes specifying the method for determining the value at which client positions will be transferred.
A Recognised Clearing House should also disclose whether:(a) the segregated assets and/or client collateral are held by the Recognised Clearing House or unaffiliated third-party custodians that hold assets on behalf of the Recognised Clearing House;(b) the Recognised Clearing House takes title transfer or if it takes a security interest, whether it has a right of use or re-use of client collateral and when;(c) the clients' collateral is protected on an individual or omnibus basis or a Clearing Member default for different accounts; and(d) there are any constraints, such as legal or operational, that may impair its ability to segregate or transfer a Member's or other participant's clients' positions and related collateral.
In this section, assets refers to collateral held to cover positions and include the right to the transfer of assets equivalent to that collateral or the proceeds of the realisation of any collateral, but does not include default fund contributions.
In relation to a Remote Clearing House, this Chapter does not prevent other customer segregation models being offered to Clearing Members outside the Abu Dhabi Global Market. In relation to clearing members of clearing houses incorporated outside the Abu Dhabi Global Market, this Chapter does not require such clearing members to offer levels of segregation which are not made available by such clearing houses.
MIR 4.13 MIR 4.13 Rules relating to Central Securities Depositories
If a Recognised Clearing House also carries out functions of a Central Securities Depository, it may do so pursuant to its exemption or alternative may seek an additional registration as an authorised Person solely in respect of its activities as a Central Securities Depository, provided that its recognition order includes a stipulation permitting it to do so. If the recognition order does include such a stipulation, the rules that are applicable to Central Securities Depositories in COBS pursuant to COBS 10.2 will apply to that function, but that function only, and no other provisions of the Rulebook except MIR and such provisions of COBS shall apply.