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 relevant 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.
A 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 Securities Settlement Systems 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 4.7.34(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 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.