Financial Stability Standards for Central Counterparties Standard 20: Disclosure of Rules, Key Policies and Procedures, and Market Data

Guidance

A central counterparty should provide sufficient information to its participants and prospective participants to enable them to identify clearly and understand fully the risks and responsibilities of participating in the system. To achieve this objective, a central counterparty should adopt and disclose written rules, policies and procedures that are clear and comprehensive and that include explanatory material written in plain language so that participants can fully understand the system's design and operations, their rights and obligations, and the risks of participating in the system. A central counterparty's rules, policies, procedures and explanatory material need to be accurate, up to date and readily available to all current and prospective participants. Moreover, a central counterparty should disclose to participants and the public basic operational information and responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures.

20.1.1 A central counterparty should adopt clear and comprehensive rules, policies and procedures that are fully disclosed to participants. Relevant rules and key policies and procedures should also be publicly disclosed. A central counterparty's rules, policies and procedures are typically the foundation of the central counterparty and provide the basis for participants' understanding of the risks they incur by participating in the central counterparty.

20.2.1 A central counterparty should clearly communicate to all its participants the nature and scope of its assumption of risk exposure through novation, open offer or other similar legal devices. This should be clearly set out in the central counterparty's rules, policies and procedures, including identification of the point in the clearing process at which the central counterparty assumes the risk exposure. Clear disclosure of the legal device through which the central counterparty assumes risk exposure will assist participants in identifying and managing their own risks arising from the trading, clearing and settlement process (see CCP Standard 1 on legal basis).

20.3.1 Relevant rules, policies and procedures should include clear descriptions of the system's design and operations, as well as the rights and obligations of the central counterparty and its participants, so that participants can assess the risk they would incur by participating in the central counterparty.^[1] They should clearly outline the respective roles of participants and the central counterparty as well as the rules, policies and procedures that will be followed in routine operations and non-routine, though foreseeable, events, such as a participant default (see CCP Standard 12 on participant default rules and procedures). In particular, a central counterparty should have clear and comprehensive rules, policies and procedures for addressing financial and operational problems within the system. For example, rules, policies and procedures should identify which parties are to be notified of specific events and the timetables for decision-making and notification. They should make clear the degree of discretion parties are able to exercise in taking decisions that can have a direct effect on the operation of the system.

20.3.2 In addition to disclosing all relevant rules and key policies and procedures, a central counterparty should have a clear and fully disclosed process for proposing and implementing changes to its rules, policies and procedures and for informing participants, and the Reserve Bank and other relevant authorities, of these changes. Similarly, the rules, policies and procedures should clearly disclose the degree of discretion that a central counterparty can exercise over key decisions that directly affect the operation of the system, including in crises and emergencies (see also CCP Standard 1 on legal basis and CCP Standard 2 on governance). For example, a central counterparty's procedures may provide for discretion regarding the extension of operating hours to accommodate unforeseen market or operational problems. A central counterparty also should have appropriate procedures to minimise any conflict of interest issues that may arise when authorised to exercise its discretion.

20.4.1 Participants bear primary responsibility for understanding the rules, policies, procedures and risks of participating in a central counterparty as well as the risks they may incur when the central counterparty has links with other FMIs. A central counterparty, however, should provide all documentation, training and information necessary to facilitate participants' understanding of the central counterparty's rules, policies and procedures and the risks they face from participation. New participants should receive training, before using the system, and existing participants should receive, as needed, additional periodic training. A central counterparty should disclose to each individual participant stress test scenarios used, individual results of stress tests, and other data to help each participant understand and manage the potential financial risks stemming from participation in the central counterparty.^[2] Other relevant information that should be disclosed to participants, but typically not to the public, includes relevant aspects of the central counterparty's business continuity arrangements.^[3]

20.4.2 A central counterparty is well placed to observe the performance of its participants and should promptly identify those participants whose behaviour demonstrates a lack of understanding of, or compliance with, applicable rules, policies, procedures and risks of participation. In such cases, a central counterparty should take steps to rectify any perceived lack of understanding by the participant and take other remedial action necessary to protect the central counterparty and its participants. This may include notifying senior management within the participant institution. In cases in which the participant's actions present significant risk or present cause for the participant's suspension, the central counterparty should notify the Reserve Bank and other relevant authorities.

Disclosure framework and other information

20.5.1 A central counterparty should complete regularly, and disclose publicly, responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures. The central counterparty should provide comprehensive and appropriately detailed disclosures to support the overall transparency of the central counterparty, its governance, operations and risk management framework. In order for the disclosures to reflect correctly the central counterparty's current rules, policies, procedures and operations, the central counterparty should update its responses following material changes to the system or its environment. At a minimum, a central counterparty should review its responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures each year to ensure continued accuracy and usefulness.

20.5.2 Other relevant information for participants and, more generally, the public could include general information on the central counterparty's full range of activities and operations, such as the names of direct participants in the central counterparty, key times and dates in its operations, and its overall risk management framework (including its margin methodology and assumptions).^[4] A central counterparty should also disclose its financial condition, financial resources to withstand potential losses, timeliness of settlements, and other performance statistics. With respect to data, a central counterparty should, at a minimum, disclose basic data on transaction volumes and values, margin and collateral holdings, prefunded default resources, and liquid resources. The central counterparty should also disclose any additional data that the Reserve Bank may direct it to disclose from time to time.

Forms of disclosure

20.5.3 A central counterparty should make the relevant information and data it discloses as set forth in these CCP Standards readily available through generally accessible media, such as the internet, in English in addition to any other language(s) relevant to the scope of its operations. The data should be accompanied by robust explanatory documentation that enables users to understand and interpret the data correctly.