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.