Default Management Process
The measures to be taken in the event of default as outlined in BME CLEARING’s Rule Book, are aimed at containing losses, ensuring operations are not disrupted and that Non-Defaulting Clearing Members are not exposed to losses that they cannot anticipate or control.
According to Article 42 of BME CLEARING’s Rule Book, upon declaration of Default of a Member, Direct Clearing Client or Client, BME CLEARING, or the Member through which positions have been registered, may adopt any of the following measures:
- To suspend the Defaulting Member, Direct Clearing Client or Client or to maintain any precautionary suspension, where applicable.
- To immediately restrict the Registration of new Trades of the Defaulting Member, Direct Clearing Client or Client.
- To undertake any trades as may be necessary, including trades on financial instruments, for the purpose of reducing unhedged risks, until total coverage thereof.
- To Close-out the Defaulting Member, Direct Clearing Client or Client’s positions, in accordance with the provisions of Article 42 of the CCP´s Rulebook.
- To transfer to another Member, where possible, or otherwise close the Accounts of Clients opened in the BME CLEARING Central Register, or, where applicable, the corresponding Second-Tier Registers of the OSA.
- BME CLEARING may execute, in whole or in part, the collateral posted in its favour.
- The Member may execute, or may request BME CLEARING the execution of, in whole or in part, the collateral posted, in favour of the Member, or BME CLEARING, by the Defaulting Non Clearing Member or Client to cover margins of any kind.
- To obtain any kind of professional advice or assistance which the Member or BME CLEARING may reasonably require in relation to the management of the default, including a mandate to another firm to manage the closing-out of the positions.
- Any other measure required to mitigate the risk for BME CLEARING or its participants resulting from the default and which the Member or BME CLEARING consider necessary, informing the Competent Authorities thereof.
BME CLEARING must inform the Defaulting Member, Direct Clearing Client or Client of the measures adopted, as soon as possible; fully cooperate with the Competent Authorities; and co-operate, as long as there is reciprocity, in the exchange of information with any market, clearing house, or settlement system in which the Defaulting Member, Direct Clearing Client or Client should be acting.
The closing of positions and transfer of accounts of the Defaulting Member, Direct Clearing Client or Client and the settlement of costs, expenses and balances resulting from the default are explained in Articles 43 and 45 of the Rule Book.
When the creditor of the Final Net Balance is BME CLEARING and the Defaulting Member or the Defaulting Direct Clearing Client does not make an immediate payment, for whatever the cause, BME CLEARING will perform with respect to each Segment, except when otherwise established, the procedures indicated below (Default Waterfall), on a successive basis in the order listed, until the total Final Net Balance owed has been paid:
- The execution of the collateral posted to cover the Initial Margins for each Contract Group with debit balance.
- The execution, in this order, of the collateral corresponding to the Individual Funds for each Segment, and, if any, to the Extraordinary Margins posted by the Defaulting Member or by the Defaulting Direct Clearing Client and the collateral held in the Buffer Account.
- The execution of the Defaulting Clearing Member´s contribution to the Default Fund or the Defaulting Direct Clearing Member’s contribution to the Default Fund (posted by its Agent Member) of the Segment in which the Default occurred, and if it is insufficient and they exist, the collateral corresponding to the contributions of the Defaulting Clearing Member or of the Defaulting Direct Clearing Client to the Default Funds of all the other Segments in which the Default of the Clearing Member or the Default of the Direct Clearing Client has not given rise to a Final Net debit Balance, as well as the collateral posted by the Defaulting Member or Direct Clearing Client vis-à-vis BME CLEARING to cover any other Margin, of whatever type, Individual Fund or Extraordinary Margin.
- The assumption, with a charge to BME CLEARING dedicated own resources (Skin in the Game), of a loss equivalent to the part specifically allocated to the Segment(s) in which the Default occurred.
- The execution of the rest of the collateral posted by the non-defaulting Clearing Members and Direct Clearing Members to cover their contributions to the Default Fund of the Segment(s) in which the Default occurred.
- The requirement from the Clearing Members and from the Agent Members of the Direct Clearing Clients, on their behalf, of additional contribution to the Default Fund, whereby the Collateral contributed shall be executed immediately, to the extent required.
- The possible requirement of a contribution for service continuity in the terms provided for in the General Conditions of the Segment, in respect of which the default occurred.
- Voluntary contributions may be requested from the Clearing Members, in the terms set down in the General Conditions of the Segment in which the Default occurred, with no entitlement to a refund from BME CLEARING.
- BME CLEARING's activities will cease with respect to the Segment(s) in which the Default occurred, with the simultaneous closing of all the Positions existing at that time or in the Segment(s) in question. To this effect, the Final Net Balance of each Position shall be obtained, and the resulting payments must be made in accordance with whether the balances of the Clients, Members and BME CLEARING are debit or credit balances.
- The assumption of the losses not covered with a charge to BME CLEARING remaining equity, with the exception of the capital and remaining equity required from time to time under the applicable regulations.
- If BME CLEARING cannot reasonably continue its business operations, as a result of losses arising from the assumption of Default, it will proceed in accordance with applicable legislation.
The measures to limit exposure of Non-Defaulting Clearing Members to losses are detailed in the above Default Waterfall procedures and in the rules covering the Default Fund as per Article 29.5 of the BME CLEARING Rule Book and Default Fund Circulars.
BME CLEARING has a document, Default Management Protocol, reviewed at least annually.
ANNEX: DEFAULT MANAGEMENT PROTOCOL