44.4: Can the CCP require CMs to post intra-day margin?

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1 COMPARATIVE POWER The CCP Risk Review was designed with a cross-jurisdictional focus. Regulatory requirements reach CCPs globally, and rules are written differently across jurisdictions. These Surveys are designed to be universally relevant to parties from all jurisdictions. Responses are written in common practical language, allowing users to compare and benchmark the rules of different CCPs. Below are four questions the first two are extracts from the Base Module and the latter two are from the Client Clearing Module that demonstrate the comparative power of the Surveys. 44.4: Can the CCP require CMs to post intra-day margin? LCH.Clearnet Limited ForexClear Service ICE Clear Credit LLC HKFE Clearing Corporation Limited Japan Securities Clearing Corporation Listed Products Clearing Service Yes, in relation to futures and options Contracts, if there is a large price fluctuation (i.e., the market moves beyond the predetermined range set by the CCP) recorded at 11:00 a.m. Tokyo time, or when the CCP deems it necessary. Further details are set out below. Calculation of margin deficiency Calculation of margin deficiency Calculation of margin deficiency Calculation of margin deficiency The CCP has broad rights under the Rules, where it considers necessary, to demand that a CM transfer additional collateral to the CCP within the same day as additional variation margin. Although it is not entirely clear, it seems that all intra-day margin The CCP has broad rights under the Rules to demand that the CM transfer additional collateral, as special margin, to the CCP within the same day, if: the one-day initial margin requirement has eroded during a trading day; or Mandatory intra-day adjustment and margin Not addressed in the Rules. See Margin calls below. We assume that mandatory intra-day variation adjustment and margin is calculated immediately before The CCP will calculate the margin deficiency with respect to the intra-day margin of each CM during the relevant day (no specific timing is addressed in the Rules).

2 calls will be treated as calls for initial margin. Margin calls Normally the CCP will call intraday margin through UK PPS accounts. However, where the CCP wishes to make an intra-day call after UK PPS closes (4pm London time), such a call will be made upon the CM s nominated US PPS account. The CCP has the ability to call USD in respect of an intra-day margin call up until 4pm New York time (9pm London time). Asian markets The CCP may make a margin call in relation to CMs clearing in the Asian/Pacific markets between 8am and 4pm Hong Kong time. The CCP must receive confirmation of payment from the CCP s bank within 1 hour of the CCP requesting funds from the CM. The CCP mandates that CMs clearing in certain Asian markets maintain bank accounts in Hong in the CCP s sole discretion, a CM exhibits insufficient levels of risk collateralization to protect the CM or the CCP. Margin calls After a determination of an intraday margin requirement, the CCP may make the special margin call with respect to the relevant CM. then. Additional margin and intra-day variation adjustment Not addressed in the Rules. See margin calls below. We assume that additional margin and intraday variation adjustment is calculated immediately before then. Margin Calls Mandatory intra-day variation adjustment and margin Following market open of the T Session on each Business Day, the CCP will, in accordance with the Procedures, call for a mandatory intra-day variation adjustment and margin in respect of all open Contracts held by a CM immediately before market opening in markets with a T+1 Session and any other markets whose underlying instrument is the same as or similar to any of the markets with a T+1 Session. Additional margin and intra-day variation adjustment If according to any intra-day calculation of the liabilities arising Margin Calls Generally, when calling for intraday margin, the CCP will immediately post a notification of an intra-day margin call on the CCP s website and notify the relevant CM through the Target- JSCC site, which is exclusive for CMs

3 Kong to facilitate margin calls during the Hong Kong day (overnight UK). Where the CCP has mandated that CMs must operate an account in Hong Kong, each CM is required to maintain 1 USD account at a bank in Hong Kong where the CCP also operates an account. Currently, only USD accounts are operated in Hong Kong. Satisfaction of margin calls GBP, EUR or USD can be used to cover margin obligations intra-day. Between pm (London time) only USD will be called in London. The CCP must receive confirmation of payment from the CM s nominated PPS bank(s) within 1 hour of receipt of the intra-day call by the relevant bank branch. Failure of a bank to confirm a PPS call within 1 hour may result in the CM being declared in default. Late confirmation of PPS calls are reported to the regulators of the CCP. Satisfaction of margin calls A CM must satisfy the margin call within one business hour of such call. from the open Contracts of a CM, any capital-based trading limit imposed on the CM in accordance with the Procedures is determined by the CCP to have been exceeded, or if in the opinion of the CCP sudden fluctuations of any market operated by the Exchange are apparent, the CCP may, during the T session of any Business Day, call for intra-day variation adjustment and/or, in the latter case, additional margin. Satisfaction of margin calls Mandatory intra-day variation adjustment and margin CMs must pay all mandatory intraday variation adjustment and margin immediately on demand from the CCP. The Procedures set out that, unless otherwise permitted by the CCP, all margin calls for mandatory intra-day variation adjustment and margin must be paid by the CM no later than two hours after the report setting out such margin demand is issued to the CM or such shorter period as may be from time to time be prescribed by the CCP. Satisfaction of margin calls Generally, CMs must satisfy the margin call by a bank transfer to an account under the name of the CCP held at a bank selected by the CM from the banks designated by the CCP by 4:00 p.m. Tokyo time on the same day as such intra-day margin calls

4 - 4 - Additional margin and intra-day variation adjustment Additional margin and intra-day variation adjustment shall be payable immediately on demand from the CCP. The Procedures set out that, unless otherwise permitted by the CCP, all margin calls for intra-day variation adjustment must be paid by the CM no later than one hour after the report setting out such margin demand is issued to the CM or such shorter period as may be from time to time be prescribed by the CCP. It is not clear in the Procedures what the exact timing for the satisfaction of additional margin is.

5 71.4: Is membership withdrawal contingent upon the approval of the CCP? LCH.Clearnet Limited ForexClear Service The Options Clearing Company - Listed LME Clear Limited Japan Securities Clearing Corporation Listed Products Clearing Service The Rules do not specifically provide for any qualification to the approval of the CCP, however, in practice, the approval of the CCP may not be withheld unreasonably if a CM duly follows the procedure for withdrawal. No. Withdrawal is not contingent upon the approval of the CCP. However, collateral will not be returned by the CCP to the withdrawing CM, as applicable, until the CCP is satisfied that: No, with respect to withdrawals following a default by another CM. For the required prerequisites for withdrawal, see item Withdrawal in the ordinary course is not addressed in the Rules. No. Withdrawal is not contingent upon the approval of the CCP. However, collateral will not be returned by the CCP to the withdrawing CM, as applicable, until the CCP is satisfied that: the withdrawing CM is not a defaulting CM; and (71.5) all Contracts of such CM have been closed out in full; and all obligations of the withdrawing CM to which the relevant collateral is capable of being applied in accordance with the Rules have been irrevocably paid or discharged in full and that no such obligations are capable of arising. Where there has been a default by another CM and a charge has been levied against a non-defaulting CM s default fund contribution, a CM may withdraw by giving notice to the CCP within 5 business days of such charge against the default fund and by complying with the following: not submitting any new Transactions (other than those that reduce its exposure) for clearing through any of its accounts after giving notice; all risk to the CCP arising from such CM s membership of the CCP has ceased to exist. If a withdrawing CM gives notice to terminate its membership during the Default Period, it is required immediately to pay and maintain additional margin to the CCP upon receipt of a notice from the CCP that the Default Period has ended. The amount of such additional margin is the difference between the current margin requirement on the CM s accounts and the amount calculated by the CCP to represent the worst case loss capable of - 5 -

6 replenishing 100% of its default fund contribution, if applicable; closing out or transferring all open positions as promptly as practicable; and being incurred on such account by such CM as a result of it continuing to use the CCP during the period until the Withdrawal Effective Date. fulfilling all outstanding obligations to the CCP

7 43.1/43.2: Do the Rules permit the CCP to invest Client cash collateral? If so, what investments are permissible? Chicago Mercantile Exchange Inc. - Listed ICE Clear Credit LLC The Options Clearing Corporation - Listed LCH.Clearnet Limited SwapClear FCM (43.1) (43.1) (43.1) (43.1) Each CM should instruct the CCP as to whether or not to invest such cash Client cash collateral delivered by such CM to the CCP by submitting to the CCP such documents as the CCP may require for such purpose. If a CM fails to issue any such instruction to the CCP in accordance with such documents, the CCP can invest such Client cash collateral in the permissible investments described at item (43.2) Not addressed in the Rules. However, CFTC Regulations permit the CCP to use, invest, or apply Client cash collateral posted by way of a security interest as permitted by applicable law. CFTC Regulation 1.25 applies to the investment of Client cash collateral. Broadly speaking, under CFTC Regulation 1.25, Client cash (43.2) The CCP is permitted to use, invest, or apply Client cash collateral posted by way of security interest as permitted by the Rules and applicable law.* CFTC Regulation 1.25 applies to the investment of Client cash collateral. Broadly speaking, under CFTC Regulation 1.25, Client cash collateral may be invested in the (43.2) The CCP may invest cash collateral in U.S. or Canadian government securities. (43.2) The CCP s investment of Client cash collateral is limited to U.S. Treasury securities (through outright purchases, repurchase or reverse purchase transactions) in accordance with all applicable laws

8 collateral may be invested in the following instruments, subject to certain additional conditions: US government securities; municipal securities; US agency obligations; certificates of deposit; commercial paper; corporate notes or bonds; and money market mutual funds. See also items 153 and 154 of the Base Module regarding the CCP s IEF programs. Cross-margined Futures collateral will be subject to the investment policies of the IRS service. See the IRS service Client Clearing Module for additional information. following instruments, subject to certain additional conditions: U.S. government securities; municipal securities; U.S. agency obligations; certificates of deposit; commercial paper; corporate notes or bonds; and money market mutual funds. In addition, a CCP may buy and sell the permitted investments listed above pursuant to repurchase and reverse repurchase agreements, subject to certain conditions. *Note: in its Disclosure Framework, the CCP states that it invests CM collateral, without clarifying whether CM posted collateral is meant to cover Client collateral posted by such CM, in reverse repurchase agreements of U.S. treasury securities

9 44.1/44.2: Does the CCP have the right to rehypothecate Client non-cash collateral under the Rules? If so, are there any restrictions on this ability? Chicago Mercantile Exchange Inc. - Listed (44.1) (44.1) ICE Clear US The Options Clearing Corporation - Listed (44.1) (44.1) LCH.Clearnet Limited SwapClear FCM (44.2) (44.2) No. (44.2) No. The CCP s rights in respect of Client non-cash collateral will be the same as its rights in respect of CM non-cash collateral (see item 156 of the Base Module). (44.2) Not addressed in the Rules. However, CFTC Regulations permit the CCP to use, invest, or apply Client non-cash collateral posted by way of security interest as permitted by the Rules and applicable law. CFTC Regulation 1.25 applies to the investment of Client non-cash collateral. Under CFTC Regulation 1.25, a CCP is permitted to sell securities deposited by Clients as margin pursuant to reverse repurchase agreements, subject to certain conditions. More specifically, the CCP has the right to transform Client non-cash collateral into cash to satisfy liquidity needs related to the Client omnibus margin account The CCP is permitted to use, invest, or apply Client non-cash collateral posted by way of security interest as permitted by the Rules and applicable law. CFTC Regulation 1.25 applies to the investment of Client non-cash collateral. Under CFTC Regulation 1.25, a CCP is permitted to sell securities deposited by Clients as margin pursuant to repurchase agreements, subject to certain conditions. More specifically, the CCP has the right to transform Client non-cash collateral into cash to satisfy liquidity needs related to the Client Omnibus Margin Account of a defaulting CM not only through the sale of such non- N/A N/A - 9 -

10 of a defaulting CM not only through the sale of such non-cash collateral, but also through the use of liquidity arrangements, such as lines of credit and repurchase agreements. cash collateral, but also through the use of liquidity arrangements, such as lines of credit and repurchase agreements. CMs are also required to submit the report regarding permitted investments using Client non-cash collateral discussed in item