MIR 4.5 MIR 4.5 Business rules and Default Rules
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.
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 must have appropriate rules and procedures for the risk management framework and process.
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.
The 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 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.
The Recognised Body must have adequate arrangements:(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.