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.