| (1) |
As contemplated in Regulation 39, a central counterparty must invest its financial resources only in cash or highly liquid securities. |
| (2) |
The fundamental characteristics of highly liquid securities, as a minimum, mean— |
| (a) |
low credit and market risk, that is, for example— |
| (i) |
assets or instruments that are less risky tend to have higher liquidity; |
| (ii) |
a high credit standing of an issuer and a low degree of subordination increases an asset or instrument’s liquidity; |
| (iii) |
low duration, low volatility, low inflation risk and denomination in a convertible currency with low foreign exchange risk enhances an asset or instrument’s liquidity; |
| (b) |
ease and certainty of valuation, that is, for example: |
| (i) |
an asset or instrument’s liquidity increases if market participants are more likely to agree on its valuation; |
| (ii) |
the pricing formula of the asset or instrument does not contain strong assumptions; |
| (iii) |
the inputs into the pricing formula are publicly available; |
| (c) |
low correlation with risky assets, for example, the asset or instrument is not subject to wrong way risk (highly correlated risk); |
| (d) |
the asset or instrument is listed on a licensed exchange or external exchange. |
| (3) |
The market related characteristics, as a minimum, mean— |
| (a) |
the existence of an active and sizeable market, which may be evidenced by factors such as a large number of market participants, high trading volume and historical evidence of market breadth, that is, price impact per unit of liquidity, and market depth, that is, units of the assets that can be traded for a given price impact; |
| (b) |
the presence of committed market makers, which may be evidenced by factors such as available quotes for buying or selling of the asset or instrument; |
| (c) |
low market concentration, that is, a diverse group of buyers and sellers exist that increases the reliability of the asset or instrument’s liquidity; |
| (d) |
evidence of historic flight to quality, that is, historically, the market has shown tendencies to move into types of assets or instruments during systemic crises. |
| (4) |
All highly liquid securities held by the central counterparty must be unencumbered, and for purposes of these Regulations, unencumbered means not pledged, either explicitly or implicitly, to secure, collateralise or credit-enhance any transaction, or not otherwise subject to any further commitment, provided that assets or instruments received in reverse repo, resale or securities financing transactions that— |
| (a) |
are held at the central counterparty; |
| (b) |
have not been re-hypothecated; and |
| (c) |
are legally and contractually available for the central counterparty's use, |
may be included in the central counterparty's portfolio of highly liquid securities.
| (5) |
A central counterparty may hedge the price risk associated with ownership of the relevant assets or instruments, and still include the assets in the pool of highly liquid securities, provided that if the central counterparty chooses to hedge the associated risks, it must take into account the potential cash outflow that would arise if the hedge was to be closed out early or in the event of the asset being sold. |
| (6) |
Highly liquid securities may not be— |
| (a) |
co-mingled with or used as hedges on trading positions; |
| (b) |
designated as collateral; or |
| (c) |
designated as credit enhancements in structured transactions or be designated to cover operational costs. |
| (7) |
A central counterparty must maintain sufficient liquid resources in each relevant currency, and must therefore maintain liquid resources consistent with the distribution of the central counterparty's liquidity needs by currency, that is, the central counterparty must— |
| (a) |
ensure that it is able to generate the required liquidity in the currency and jurisdiction in which the relevant requirement may arise to cater for daily and intraday needs; |
| (b) |
monitor and report to its senior management its holding of highly liquid securities by currency to ensure that all relevant currency mismatches are duly managed; |
| (c) |
take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions, and that sudden, adverse exchange rate movements may sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges that the central counterparty may have in place. |
| (8) |
A central counterparty must actively monitor and control its liquidity risk exposures and funding needs at the level of each material individual legal entity and the group as a whole, taking into account any relevant legal, regulatory or operational limitations that may affect the transferability of liquidity. |
| (9) |
A central counterparty must have in place sufficiently robust policies, processes and procedures to periodically monetise a portion of its highly liquid securities through repo or outright sale to the market in order to— |
| (i) |
its access to the market; |
| (ii) |
the effectiveness of its processes for monetisation; and |
| (iii) |
the usability of the assets, and |
| (b) |
minimise the risk of negative signalling during a period of stress. |
| (10) |
No instruments acquired in terms of a securities lending transaction shall qualify as highly liquid securities. |
| (11) |
In order to allow a central counterparty time to adjust its portfolio of highly liquid securities, when an asset or instrument subsequently is deemed to not meet the characteristics of highly liquid securities, the central counterparty may retain the asset or instrument in its portfolio of highly liquid securities for a period of no more than 30 calendar days following the date that the asset or instrument became so disqualified. |
| (12) |
A central counterparty may use, to mitigate and manage liquidity risk stemming from— |
| (a) |
a clearing member default, either individually or in combination, exposure limits, collateral requirements and prefunded default resources; |
| (b) |
a service provider or a linked market infrastructure, individually or in combination, concentration or exposure limits, and collateral requirements. |
| (13) |
A central counterparty must manage its liquid resources to avoid excessive intraday or overnight exposure to one entity. |
| (14) |
An asset acquired by a central counterparty in terms of a resale agreement and which asset is a highly liquid security as contemplated in subregulation (2) and Regulation 39, shall qualify as a highly liquid security of the central counterparty, provided that the asset has not been disposed of under a further repurchase agreement and has not been encumbered or lodged as security by the central counterparty. |
| (15) |
A central counterparty must value highly liquid securities held at the close of business on any day based on daily market yields published. |
National Environmental Management Act, 1998 (107 of 1998)
