3.1.8. Liquidity incentive schemes
An Authorised Investment Exchange must not introduce a liquidity incentive scheme or any other scheme for encouraging bids on a trading venue or to increase the volume of business transacted unless it has obtained the AFSA’s prior written approval for the scheme.
3.1.9. Settlement and Clearing facilitation services
An Authorised Investment Exchange must ensure that satisfactory arrangements are made for securing the timely discharge (whether by performance, compromise or otherwise), Clearing and settlement of the rights and liabilities of the parties to transactions effected on the Authorised Investment Exchange (being rights and liabilities in relation to those transactions).
3.2. Admission of Securities to trading
3.2.1. Admission to Trading Rules
An Authorised Investment Exchange must make clear and transparent rules concerning the admission of Securities or Units in a Listed Fund to trading on its facilities.
3.2.2. Content of Admission to Trading Rules
The rules of the Authorised Investment Exchange must ensure that:
(a) Securities or Units in a Listed Fund admitted to trading on an Authorised Investment Exchange’s facilities are capable of being traded in a fair, orderly and efficient manner;
(b) Securities or Units in a Listed Fund admitted to trading on an Authorised Investment Exchange’s facilities are freely negotiable; and
(c) contracts for derivatives admitted to trading on an Authorised Investment Exchange’s facilities are designed so as to allow for their orderly pricing as well as for the existence of effective settlement conditions.
Guidance: Fair, orderly and efficient trading
When assessing whether a Security or Unit in a Listed Fund is capable of being traded in a fair, orderly and efficient manner, the Authorised Investment Exchange shall take into account, depending on the nature of the Security or Unit in a Listed Fund being admitted, whether the following criteria are satisfied:
(a) the terms of the Security or Unit in a Listed Fund are clear and unambiguous and allow for a correlation between the price of the Security or Unit in a Listed Fund and the price or other value measure of the underlying;
(b) the price or other value measure of the underlying is reliable and publicly available; and
(c) there is sufficient information publicly available of a kind needed to value the Security or Unit in a Listed Fund.
Guidance: Effective settlement conditions
When assessing whether a contract for a derivative contains effective settlement conditions, the Authorised Investment Exchange shall take into account, depending on the nature of the derivative being admitted, whether the following criteria are satisfied:
(a) the arrangements for determining the settlement price of the derivative ensure that this price properly reflects the price or other value measure of the relevant underlying Investment; and
(b) where the settlement of the derivative requires or provides for the possibility of the delivery of an underlying Investment or asset rather than cash settlement, there are adequate settlement and delivery procedures for that underlying Investment as well as adequate arrangements to obtain relevant information about that underlying Investment.
3.2.3. Undertaking to comply with AFSA rules
An Authorised Investment Exchange may not admit Securities or Units in a Listed Fund to trading unless the Person who seeks to have such Investments admitted to trading:
(a) gives an enforceable undertaking to the AFSA to submit unconditionally to the jurisdiction of the AFSA in relation to any matters which arise out of or which relate to its use of the facilities of the Authorised Market Institution, including but not limited to requirements in MAR relating to Reporting Entities;
(b) agrees in writing to submit unconditionally to the jurisdiction of the AIFC Courts in relation to any disputes, or other proceedings in the AIFC, which arise out of or relate to its use of the facilities of the Authorised Market Institution;
(c) agrees in writing to subject itself to the AIFC laws in relation to its use of the facilities of the Authorised Market Institution; and
(d) appoints and maintains at all times, an agent for service of process in the AIFC and requires such agent to accept its appointment for service of process.
Guidance
See Guidance to AMI 2.6.4
The Authorised Investment Exchange must maintain arrangements regularly to review whether the Securities or Units in a Listed Fund admitted to trading on its facilities comply with the Admission to Trading Rules.
3.2.5. Verification of compliance by issuers with Market Rules
The Authorised Investment Exchange must maintain effective arrangements to verify that issuers of Securities or Units in a Listed Fund admitted to trading on a regulated market operated by it comply with the Market Rules.
3.2.6. Arrangements for access to information
The Authorised Investment Exchange must maintain arrangements to assist users of a market operated by it to obtain access to information made public under the Market Rules.
3.3. Suspending or removing Securities or Units in a Listed Fund from trading
The rules of an Authorised Investment Exchange must provide that the Authorised Investment Exchange has the power to suspend or remove from trading on its facilities any Securities or Units in a Listed Fund which no longer comply with its rules.
3.3.2. Limitation on power to suspend or remove Securities or Units in a Listed Fund from trading
An Authorised Investment Exchange may not suspend or remove from trading on its facilities any Security or Unit in a Listed Fund which no longer complies with its rules, where such step would be likely to cause significant damage to the interests of investors or the orderly functioning of the financial markets.
3.3.3. Suspension or removal from trading of associated derivatives
Where the Authorised Investment Exchange suspends or removes any Security or Unit in a Listed Fund from trading on its facilities, it must also suspend or remove from trading on its facilities any derivative that relates to or is referenced to that Investment where that is required to support the objectives of the suspension or removal of trading of that Investment.
3.3.4. Publication of decision to suspend or remove Securities or Units in a Listed Fund from trading
Where the Authorised Investment Exchange suspends or removes any Security or Unit in a Listed Fund from trading on its facilities, including any derivative in accordance with AMI 3.3.3, it must notify the AFSA and make that decision public.
3.3.5. Publication of decision to lift suspension or re-admit Securities or Units in a Listed Fund to trading
Where the Authorised Investment Exchange lifts a suspension or re-admits any Security or Unit in a Listed Fund to trading on its facilities, including any derivative suspended or removed from trading in accordance with AMI 3.3.3, following a decision made under AMI 3.3.1, it must notify the AFSA and make that decision public.
3.4.1. Pre-trade transparency obligation
An Authorised Investment Exchange must make available to the public on a continuous basis during normal trading hours the current bid and offer prices of Securities or Units in a Listed Fund traded on its systems and the depth of trading interests at those prices.
Guidance
The disclosure required by 3.4.1 will depend upon the type of trading system employed, including continuous auction order-book, quote-driven, periodic auction and hybrid trading systems. An Authorised Investment Exchange should discuss its proposals for compliance with this requirement with the AFSA. The AFSA may waive or modify the requirement in respect of certain types of trade or types of Investment pursuant to Section 8 of the Framework Regulations.
3.4.2. Post-trade transparency obligation
An Authorised Investment Exchange must make available to the public in as close to real-time as technically possible the price, volume and time of the transactions executed in respect of Securities or Units in a Listed Fund traded on its facilities.
Guidance
The AFSA may waive or modify the requirement in AMI 3.4.2 in respect of certain types of trade or types of Investment pursuant to Section 8 of the Framework Regulations.
In particular, subject to AMI 1.1.2 (outsourcing) and to obtaining the approval of the AFSA, an Authorised Investment Exchange may delegate its provision of post-trade information to a regulatory news service or similar third party entity.
An Authorised Investment Exchange must have legally enforceable Default Rules which, in the event of a Member of the Authorised Investment Exchange being or appearing to be unable to meet his obligations in respect of one or more Market Contracts, enable it to suspend or terminate such Member's Membership and cooperate by sharing information with its Authorised Clearing House or Recognised Non-AIFC Clearing House, and enable action to be taken in respect of unsettled Market Contracts to which that Member is a party.
Guidance
The AIFC Insolvency Rules contain provisions which protect action taken by an Authorised Investment Exchange under its Default Rules from the normal operation of insolvency law which might otherwise leave this action open to challenge by a relevant office-holder.
3.5.2. Public notice of suspended or terminated Membership
The Authorised Investment Exchange must issue a public notice on its website in respect of any Member whose Membership is suspended or terminated in accordance with AMI 3.5.1.
3.5.3. Cooperation with office-holder
The Authorised Investment Exchange must cooperate, by the sharing of information and otherwise, with the AFSA, any relevant office-holder and any other authority or body having responsibility for any matter arising out of, or connected with, the default of a Member of the Authorised Investment Exchange or the default of an Authorised Clearing House or another Authorised Investment Exchange.
3.6.1. General requirements relating to Listing Rules
(1) An Authorised Investment Exchange wishing to admit Securities or Units in a Listed Fund to its own Official List must:
(a) have Listing Rules which comply with the requirements of AMI 3.6.2; and
(b) ensure that its Listing Rules are approved by the AFSA.
(2) Any amendment to an Authorised Investment Exchange’s Listing Rules must, prior to the amendment becoming effective, have been:
(a) made available for a reasonable period of time to the market for consultation; and
(b) approved by the AFSA.
(3) In urgent cases, the AFSA may, on written application by the Authorised Investment Exchange, dispense with the requirement in (2)(a).
3.6.2. Contents of Listing Rules
The Listing Rules of an Authorised Investment Exchange must include requirements relating to:
(a) procedures for admission of Securities or Units in a Listed Fund to its Official List, including:
(і) requirements to be met before such Investments may be granted admission to an Official List; and
(ii) agreements in connection with admitting such Investments to an Official List;
(b) procedures for suspension and delisting of Securities or Units in a Listed Fund from an Official List;
(c) the imposition on any Person of obligations to observe specific standards of conduct or to perform, or refrain from performing, specified acts, reasonably imposed in connection with the admission of Securities or Units in a Listed Fund to an Official List or continued admission of such Investments to an Official List;
(d) penalties or sanctions which may be imposed by the Authorised Investment Exchange for a breach of the Listing Rules;
(e) procedures or conditions which may be imposed, or circumstances which are required to exist, in relation to matters which are provided for in the Listing Rules;
(f) actual or potential conflicts of interest that have arisen or might arise when a Person seeks to have Securities or Units in a Listed Fund admitted to an Official List; and
(g) such other matters as are necessary or desirable for the proper operation of the listing rule process and the market.
3.6.3. Publication of Listing Rules
(1) An Authorised Investment Exchange must publish, and make freely available, its Listing Rules.
(2) Where an Authorised Investment Exchange has made any amendments to its Listing Rules, it must have adequate procedures for notifying users of such amendments.
3.6.4. Compliance with Listing Rules
(1) An Authorised Investment Exchange which is permitted to maintain an Official List must ensure the function is properly and independently operated.
(2) An Authorised Investment Exchange must have procedures in place to ensure that:
(a) its Listing Rules are monitored and enforced; and
(b) complaints regarding Persons subject to the Listing Rules are investigated.
(3) An Authorised Investment Exchange must ensure that:
(a) where appropriate, disciplinary action can be carried out and financial and other types of penalties can be imposed on Persons subject to the Listing Rules; and
(b) adequate appeal procedures are in place.
3.6.5. Application for admission of Securities or Units in a Listed Fund to an Official List
(1) Applications for the admission of Securities or Units in a Listed Fund to an Official List must be made by the issuer of such Investments, or by a third party on behalf of and with the consent of the issuer of such Investments.
(2) An Authorised Investment Exchange must, before granting admission of any Securities or Units in a Listed Fund to an Official List maintained by it:
(a) be satisfied that the applicable requirements, including those in its Listing Rules, have been or will be fully complied with in respect of those Investments; and
(b) comply with the requirements relating to notification to the AFSA in (4) and (5).
(3) An Authorised Investment Exchange must notify an applicant in writing of its decision in relation to the application for admission of Securities or Units in a Listed Fund to its Official List.
(4) Subject to (5), at least 5 business days prior to an admission of Securities (other than (і) Exempt Securities or (ii) Equity Securities in connection with Pre-IPO Listings) or Units in a Listed Fund to its Official List, an Authorised Investment Exchange must provide the AFSA with notice of the decision and include the following information in the notification:
(a) a copy of the listing application;
(b) a copy of the assessment of the listing application carried out by the Exchange; and
(c) any information requested by the AFSA.
(4-1) Subject to (5), at least 2 business days prior to an admission of Exempt Securities to its Official List or Equity Securities to its Official List under the sub-heading «Pre-IPO Listings», an Authorised Investment Exchange must provide the AFSA with notice of the decision and include the information specified in (4) above.
(5) An Authorised Investment Exchange must immediately notify the AFSA of any decision to suspend, restore from suspension or de-list any Securities or Units in a Listed Fund from its Official List and the reasons for the decision.
3.6.6. Undertaking to comply with AFSA rules
An Authorised Investment Exchange may not admit Securities or Units in a Listed Fund to an Official List unless the issuer of such Investments:
(a) gives an enforceable undertaking to the AFSA to submit unconditionally to the jurisdiction of the AFSA in relation to any matters which arise out of or which relate to its use of the facilities of the Authorised Market Institution, including but not limited to requirements in MAR relating to Reporting Entities;
(b) agrees in writing to submit unconditionally to the jurisdiction of the AIFC Courts in relation to any disputes, or other proceedings in the AIFC, which arise out of or relate to its use of the facilities of the Authorised Market Institution;
(c) agrees in writing to subject itself to the AIFC laws in relation to its use of the facilities of the Authorised Market Institution; and
(d) appoints and maintains at all times, an agent for service of process in the AIFC and requires such agent to accept its appointment for service of process.
Guidance
See Guidance to AMI 2.6.4
4. RULES APPLICABLE TO AUTHORISED CLEARING HOUSES
4.1. Admission of Securities or Units in a Listed Fund to Clearing
4.1.1. Admission to clearing rules
An Authorised Clearing House must have clear and objective criteria included in its rules according to which Investments can be cleared or settled on its facilities.
4.2.1. Risk management framework
(1) An Authorised Clearing House must have a comprehensive risk management framework (і.e. detailed policies, procedures and systems) capable of managing legal, credit, liquidity, operational and other risks to which it is exposed.
(2) The risk management framework in (1) must:
(a) encompass a regular review of material risks to which the Clearing House is exposed and the risks posed to other market participants resulting from its operations; and
(b) be subject to periodic review by its board as appropriate to ensure that it is effective and operating as intended.
4.2.2. Safeguards for investors
An Authorised Clearing House must ensure that:
(a) access to its facilities is subject to criteria designed to protect the orderly functioning of those facilities and the interests of investors;
(b) its clearing services involve satisfactory arrangements for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions in respect of which it provides such services (being rights and liabilities in relation to those transactions);
(c) satisfactory arrangements are made for recording transactions which are cleared or to be cleared by means of its facilities; and
(d) appropriate measures are adopted to reduce the extent to which the clearing house's facilities can be used for a purpose connected with market abuse or Financial Crime, and to facilitate their detection and monitor their incidence.
An Authorised Clearing House must maintain effective arrangements (which may include rules) for ensuring that losses that:
(a) arise otherwise than as a result of a default of a Member of the Authorised Clearing House; and
(b) threaten the Authorised Clearing House’s solvency;
are allocated with a view to ensuring that the Authorised Clearing House can continue to provide its activities.
4.3. Credit and liquidity risk management
(1) An Authorised Clearing House must establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing and settlement processes.
(2) An Authorised Clearing House operating a payment system or Securities Settlement System must cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources.
(3) An Authorised Clearing House operating as a Central Counterparty must:
(a) cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources;
(b) perform stress tests, on a regular basis as appropriate to the nature, scale and complexity of its operations, using models containing standards and predetermined parameters and assumptions; and
(c) at least monthly (and more frequently if the Securities or Units in a Listed Fund cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by its participants increase significantly), carry out a comprehensive and thorough analysis of stress testing models, scenarios, and underlying parameters and assumptions used to ensure that they are appropriate for determining the required level of default protection in light of current and evolving market conditions; and
(d) at least annually, conduct an independent review and validation of its financial risk management models.
(1) An Authorised Clearing House which requires collateral to manage its own, its Members’ or other participants’ credit risks arising in the course of or for the purposes of its payment, clearing, and settlement processes must:
(a) only accept collateral with low credit, liquidity, and market risks; and
(b) set and enforce appropriately conservative haircuts and concentration limits.
(2) An Authorised Clearing House must, for the purposes of meeting the requirement in (1), establish and implement a collateral management system that is well designed and operationally flexible. Such a system must, at a minimum:
(a) limit the assets it accepts as collateral to those with low credit, liquidity, and market risks;
(b) establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions;
(c) to reduce the need for procyclical adjustments, establish, to the extent practicable and prudent, stable and conservative haircuts that are calibrated to include periods of stressed market conditions;
(d) avoid concentrated holdings of certain assets where that would significantly impair the ability to liquidate such assets quickly without significant adverse price effects; and
(e) mitigate, if it accepts cross-border collateral, the risks associated with such use. Such measures must ensure that the collateral can be used in a timely manner.
An Authorised Clearing House operating as a Central Counterparty must:
(a) have a margin system which establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves;
(b) use a reliable source of timely price data for its margin system;
(c) have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable;
(d) adopt initial margin models and parameters that are risk-based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default;
(e) mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures;
(f) ensure that it has the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants;
(g) analyse and monitor its model performance and overall margin coverage by conducting rigorous daily back testing and at least monthly, and more frequent where appropriate, sensitivity analysis; and
(h) regularly review and validate its margin system.
(1) An Authorised Clearing House must:
(a) have a robust framework to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities;
(b) have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity;
(c) regularly test the sufficiency of its liquid resources through rigorous stress testing; and
(d) establish explicit rules and procedures that enable the Authorised Clearing House to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants.
(2) An Authorised Clearing House operating a payment system or Securities Settlement System must maintain sufficient liquid resources in all relevant currencies to effect same-day settlement, and where appropriate intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.
(3) An Authorised Clearing House operating as a Central Counterparty must maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the two largest aggregate payment obligations to the Authorised Clearing House in extreme but plausible market conditions.
(1) An Authorised Clearing House must have rules and procedures which clearly define:
(a) the point at which settlement is final according to the relevant governing law; and
(b) the point after which unsettled payments, transfer instructions, or other obligations may not be cancelled by a participant.
(2) An Authorised Clearing House must complete final settlement no later than the end of the value date.
(3) Notwithstanding (1) above, a settlement by an Authorised Clearing House is final, irrevocable and binding and may not under any circumstances be reversed or avoided after:
(a) an amount of money is credited to or debited from a depository account; or
(b) an Investment approved for admission to the depository is credited to or debited from a depository account.
(4) Notwithstanding (1) above, transfer instructions and settlement are legally enforceable and, even in the event of insolvency proceedings against a participant, shall be binding on third parties, provided that transfer instructions were entered into a system before the moment of opening of such insolvency proceedings. Where, exceptionally, transfer instructions are entered into a system after the moment of opening of insolvency proceedings and are carried out on the day of opening of such proceedings, they shall be legally enforceable and binding on third parties only if, after the time of settlement, the Authorised Clearing House can prove that it was not aware, nor should have been aware, of the opening of such proceedings.
(5) For the purpose of (4), the moment of opening of insolvency proceedings shall be the moment when the relevant judicial or administrative authority handed down its decision.
(1) Where practical, an Authorised Clearing House must conduct its money settlements in central bank money.
(2) Where a Clearing House conducts its money settlements using commercial bank money, it must:
(a) adopt appropriate measures to minimise and strictly control the credit and liquidity risk arising from such use;
(b) ensure that its legal agreements with any settlement banks, at a minimum:
(і) specify clearly when transfers on the books of individual settlement banks are expected to occur and when they are final; and
(ii) ensure that funds received are transferable as soon as possible, if not intra-day, at least before the end of the payments day to enable it and its Members and other participants on its facilities to manage their credit and liquidity risks.
An Authorised Clearing House must:
(1) have rules and procedures which clearly state its obligations with respect to the delivery of physical instruments or commodities.
(2) identify, monitor, and manage the risks and costs associated with the storage and delivery of physical instruments or commodities.
4.5. Central securities depositories and exchange-of-value settlement systems
4.5.1. Central securities depositories
An Authorised Clearing House acting as a Central Securities Depository must:
(1) have appropriate rules, procedures, and controls, including robust accounting practices, to safeguard the rights of issuers and holders of Securities or Units in a Listed Fund, prevent the unauthorised creation or deletion of Securities or Units in a Listed Fund, and conduct periodic and at least daily reconciliation of issues of Securities or Units in a Listed Fund it maintains;
(2) prohibit overdrafts and debit balances in accounts of Securities or Units in a Listed Fund;
(3) maintain Securities or Units in a Listed Fund in an immobilised or dematerialised form for their transfer by book entry;
(4) protect assets against custody risk through appropriate rules and procedures consistent with its legal framework;
(5) ensure segregation between the Central Securities Depository’s own assets and the securities of its participants and segregation among the securities of participants; and
(6) identify, measure, monitor, and manage its risks from other activities that it may perform.
4.5.2. Central security depository links
(1) A CSD must not establish any link with another CSD (CSD link) unless:
(a) it has:
(і) prior to establishing the CSD link, identified and assessed potential risks, for itself and its Members and other participants using its facilities, arising from establishing such a link;
(ii) adequate systems and controls to effectively monitor and manage, on an on-going basis, risks identified under (a) above; and
(iii) complied with the requirement in (2); and
(b) it is satisfied, on reasonable grounds, that the contractual arrangement establishing the CSD link:
(і) provides to the CSD and its Members and other participants using its facilities adequate protection relating to possible risks arising from using the other CSDs to which it is linked (linked CSDs);
(ii) in the case of a provisional transfer of securities between the CSD and linked CSDs, ensure intra-day finality by prohibiting the retransfer of securities before the first transfer of securities becomes final;
(iii) sets out the respective rights and obligations of the CSD and linked CSDs and their respective Members and other participants using their facilities; and
(iv) in the case of a linked CSD outside the AIFC, sets out clearly the applicable laws that govern each aspect of the CSD’s and the linked CSD’s operations.
(2) The CSD must be able to demonstrate to the AFSA, prior to the establishment of any CSD link, that:
(a) the link arrangement between the CSD and all linked CSDs, contains adequate mitigants against possible risks taken by the relevant CSDs, including credit, concentration and liquidity risks, as a result of the link arrangement;
(b) each linked CSD has robust daily reconciliation procedures to ensure that its records are accurate;
(c) if it or another linked CSD uses an intermediary to operate a link with another CSD, the CSD or the linked CSD has adequate systems and controls to measure, monitor, and manage the additional risks arising from the use of the intermediary;
(d) to the extent practicable and feasible, linked CSDs provide for Delivery Versus Payment (DVP) settlement of transactions between participants in linked CSDs, and where such settlement is not practicable or feasible, reasons for non-DVP settlement are notified to the AFSA before the link is approved; and
(e) where interoperable securities settlement systems and CSDs use a common settlement infrastructure, there are:
(і) identical moments established for the entry of transfer orders into the system;
(ii) irrevocable transfer orders; and
(iii) finality of transfers of securities and cash.
4.5.3. Exchange-of-value settlement systems
An Authorised Clearing House operating an exchange-of-value settlement system must eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the Authorised Clearing House settles on a gross or net basis and when finality occurs.
4.6.1. Default rules in respect of Market Contracts
(1) An Authorised Clearing House must have Default Rules which, in the event of a Member of the Authorised Clearing House being or appearing to be unable to meet his obligations in respect of one or more Market Contracts, enable action to be taken to close out his position in relation to all unsettled Market Contracts to which he is a party.
(2) The rules may authorise the taking of the same or similar action where a Member appears to be likely to become unable to meet his obligations in respect of one or more Market Contracts.
(3) If an Authorised Clearing House has arrangements for transacting business with, or in relation to common Members of, another Authorised Market Institution, it must have Default Rules which enable action to be taken in respect of unsettled Market Contracts to which that Authorised Market Institution is a party in the event of the Authorised Market Institution being or appearing to be unable to meet its obligations in respect of one or more Market Contracts.
Guidance
The AIFC Insolvency Rules contain provisions which protect action taken by an Authorised Clearing House under its Default Rules from the normal operation of insolvency law which might otherwise leave this action open to challenge by a relevant office-holder.
4.6.2. Content of Default Rules
The Default Rules of an Authorised Clearing House must clearly define and specify:
(a) circumstances which constitute a default, addressing both financial and operational default, and how the different types of default may be treated by the Authorised Clearing House;
(b) the method for identifying a default (including any automatic or discretionary default scenarios, and how the discretion is exercised in any discretionary default scenarios);
(c) potential changes to the normal settlement practices in a default scenario;
(d) the management of transactions at different stages of processing;
(e) the expected treatment of proprietary and client transactions and accounts;
(f) the probable sequencing of actions that the Authorised Clearing House may take;
(g) the roles, obligations and responsibilities of various parties, including the Authorised Clearing House, the defaulting Member and non‐defaulting participants;
(h) how to address the defaulting Member's obligations to clients;
(і) how to address the allocation of any credit losses it may face as a result of any individual or combined default among its participants with respect to their obligations to the Authorised Clearing House and how stress events are dealt with; and
(j) any other mechanisms that may be activated to contain the impact of a default, including:
(і) a default contribution fund, whereby defaulting and non‐defaulting Members or participants' pre‐funded contributions to the default contribution fund are applied to cover the losses or shortfall arising on a default on the basis of a predetermined order of priority; and
(ii) a resolution regime of the defaulting participant, involving «porting»; or
(iii) transferring the open positions and margin related to client transactions to a non‐defaulting participant, receiver, third party or bridge financial company; and
(k) for all remaining rights and liabilities of the defaulter under or in respect of unsettled Market Contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the rules, by offsetting all relevant rights, assets and liabilities on the relevant account; and