Financial Stability Standards for Central Counterparties Standard 17: Access and Participation Requirements

Guidance

Access refers to the ability to use a central counterparty's services and includes the direct use of the central counterparty's services by participants, including other market infrastructures (for example, trading platforms) and, where relevant, service providers (for example, matching and portfolio compression service providers). In some cases, this includes the rules governing indirect participation. A central counterparty should allow for fair and open access to its services. It should control the risks to which it is exposed by its participants by setting reasonable risk-related requirements for participation in its services. A central counterparty should ensure that its participants and any linked FMIs have the requisite operational capacity, financial resources, legal powers and risk management expertise to prevent unacceptable risk exposure for the central counterparty and other participants. A central counterparty's participation requirements should be clearly stated and publicly disclosed so as to eliminate ambiguity and promote transparency.

17.1.1 Restrictions on access can result in highly tiered clearing arrangements and potentially give rise to concentration risks (see CCP Standard 18 on tiered participation arrangements). Further, direct access to one or more central counterparties may play an important role in meeting other public policy objectives around the depth, efficiency and liquidity of markets, and support any market-wide plan for the safe and efficient clearing of certain classes of financial instruments (for example, any mandatory clearing of certain classes of derivatives). Care should therefore be taken that participation requirements do not arbitrarily limit access to a central counterparty's services.

17.1.2 While pursuing the benefits of fair and open access, however, a central counterparty's participation requirements should not compromise its risk-based controls or conflict with directors' statutory duties. Indeed, a central counterparty should always consider the risks that an actual or prospective participant may pose, both to the central counterparty and to other participants. This will typically entail risk-related participation requirements adequate to ensure that its participants meet appropriate operational, financial and legal standards consistent with timely fulfilment of their obligations to the central counterparty.

17.2.1 A central counterparty's participation requirements should be justified in terms of the safety of the central counterparty and the markets it serves, be tailored to the central counterparty's specific risks, be imposed in a manner commensurate with such risks, and be set out in the central counterparty's rules and publicly disclosed. The requirements should be objective and should not unnecessarily discriminate against particular classes of participants or introduce competitive distortions.^[1] Operational requirements may include reasonable criteria relating to the participant's ability and readiness (for example, its information technology capabilities) to use a central counterparty's services. Financial requirements may include reasonable risk-related capital requirements, other evidence of financial strength and creditworthiness, and contributions to prefunded default arrangements. Legal requirements may include appropriate licences and authorisations to conduct relevant activities as well as legal opinions or other arrangements that demonstrate that possible conflicts of law would not impede the ability of an applicant (for example, a foreign entity) to meet its obligations to the central counterparty. A central counterparty also may require participants to have appropriate risk management expertise. If a central counterparty admits non-regulated entities, it should take into account any additional risks that may arise from their participation and design its participation requirements and risk management controls accordingly.

17.2.2 To help address the balance between open access and risk, a central counterparty should set participation requirements and manage its participant-related risks through the use of real-time binding risk management controls and other operational arrangements that have the least restrictive impact on access that circumstances permit. One way a central counterparty can manage participant-related risks is to use real-time binding credit limits or collateral requirements. The permitted level of participation may be different for participants maintaining different levels of capital. Where other factors are equal, participants holding higher levels of capital may be permitted less restrictive risk limits or be able to participate in more functions within the central counterparty. Such risk management controls may mitigate the need for a central counterparty to impose onerous participation requirements that limit access. A central counterparty could also differentiate its services to provide different levels of access at varying levels of cost and complexity. For example, a central counterparty may wish to limit full direct participation to certain types of entities, and to apply limits to the activities of, or provide indirect access to, others. Participation requirements (and other risk controls) can be tailored to each class or tier of participants based on the risks each class or tier poses to the central counterparty and its participants.

17.2.3 When clearing on behalf of other market participants, a clearing participant assumes responsibility for the risks those market participants bring to the central counterparty. It is therefore important that the clearing participant has appropriate financial and operational resources and risk management arrangements to fulfil its obligations to the central counterparty arising from this activity. In some markets, there may be relatively few clearing participants with the financial and operational resources to fulfil this role, and therefore the potential concentration of exposures in a small number of direct clearing participants may argue for closer monitoring and perhaps more stringent participation requirements for clearing participants that provide clearing services to other market participants (see also CCP Standard 18 on tiered participation arrangements). Where tiering exists, each class of participation should be clearly defined and the participation requirements should be the same for all applicants of the same class.

17.2.4 Notwithstanding that participation requirements based solely on a participant's size or capital may be insufficiently related to risk, and therefore deserve careful scrutiny, some objective threshold metric such as minimum capital is likely to be necessary, perhaps as a backstop to other more risk sensitive requirements. Requirements such as customised collateralisation of exposures beyond certain limits are typically dependent on real-time monitoring of both a participant's credit standing and the exposures it brings to the central counterparty. Both may be subject to rapid and perhaps unexpected changes. A minimum capital requirement may therefore help to guard against unexpected shocks, which could in some circumstances deliver losses that were not directly related to the magnitude of normal course risks run by the participant. A minimum capital requirement also ensures that a participant is of sufficient scale to justify investment in more comprehensive operational and compliance frameworks. This might be expected to reduce the potential for such shocks. Moreover, a minimum capital requirement may help to ensure that participants commit significant financial resources to the clearing business and assume the responsibility that direct participation entails. Indeed, to the extent that participants have capital allocated to this specific function, they have an incentive to monitor and control the risks they bring to the central counterparty. Nevertheless, an assessment of the appropriate level of minimum capital can only be made in the context of the whole suite of a central counterparty's risk control measures.

17.3.1 A central counterparty should monitor compliance with its participation requirements on an ongoing basis through the receipt of timely and accurate information. Participants should be obliged to report any developments that may affect their ability to comply with a central counterparty's participation requirements. A central counterparty should have the authority to impose additional risk controls on a participant in situations where the central counterparty determines the participant poses heightened risk to the central counterparty. For example, if a participant's credit standing comes into doubt, the central counterparty may require the participant to provide additional margin or collateral or may place restrictions on the level or types of activities that the participant can undertake (see CCP Standard 4 on credit risk). A central counterparty should consider additional reporting requirements for non-regulated institutions. A central counterparty should also have clearly defined and publicly disclosed procedures for, in extreme cases, facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements of the central counterparty (see CCP Standard 4 on credit risk and CCP Standard 12 on participant default rules and procedures).

17.3.2 If a central counterparty has an appeals process for suspending or cancelling participation in the central counterparty, the appeals process should not detract from the central counterparty's ability to suspend or cancel participation. For serious breaches, the preferable approach would be for the suspension or cancellation to persist during an appeal, with reinstatement upon a successful appeal, rather than the suspension or cancellation being put on hold until an appeal is heard.