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Questionnaire for CDS CCPs on Protection of Customer Initial Margin - page 30 / 32





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  • e.

    Any mandatory setoff requirements for CMs or customers under applicable law;

  • f.

    Any pledge arrangements or other provisions for collateral security between CMs and customers related to cleared transactions; and

g. Whether the CM is acting as principal (rather than as agent) vis-à-vis the CCP in respect of customer transactions.

Legal Enforceability of Novation/Netting Framework

4. Please discuss the legal enforceability of the CCP’s novation and netting framework in the event of either or both (i) a CM insolvency (or the insolvency of the CM’s custodian) or (ii) a customer insolvency, giving due regard to the CCP’s ability (and, in the event of a customer insolvency, a CM’s ability) to exercise its legal and contractual remedies on (a) IM held at the CCP (or the CCP’s custodian) and (b) IM held at the CM (or the CM’s custodian).

Part VII of the Companies Act 1989 protects LCH.C’s actions taken under its Default Rules in the event of a CM insolvency (LCH.C has no concern in relation to a customer insolvency as its relationship is principal to principal with the CM).

  • a.

    How would challenges to the validity or enforceability to an underlying bilateral transaction (prior to novation) – e.g., if a transaction was entered into in bad faith, fraudulently, or in contemplation of insolvency – affect the enforceability of the novated transaction, in the event of either or both

    • (i)

      a CM insolvency or (ii) a customer insolvency? Section 164 of Part VII of the Companies Act 1989 puts ‘market contracts’ and the provision of margin etc beyond challenge unless the CCP has notice of a petition being presented. A CCP has no power to unwind registered contracts.

LCH.C is also designated under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 which allows LCH.C to benefit from the provisions of the Settlement Finality Directive.

Considerations Relating to Netting vis-à-vis the CCP

5. Please evaluate, from an accounting and regulatory capital perspective, the ability of CMs to net (i) proprietary positions against other proprietary positions and (ii) customer positions against proprietary positions, in each case vis-à-vis the CCP, upon a CCP default or insolvency.


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