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.