Notwithstanding Rule 7.22, a Clearing Member may grant margin credit, at a rate not exceeding that which is prescribed by the Clearing House, to a Third Party (including a Customer) which holds long and short positions on contracts (on the same Underlying) with the Clearing House and another clearing house to the extent that the risk on the position in one clearing house is set-off against another ("inter-exchange cross margining"), if the following conditions are satisfied:
7.22A.1.1 The risk-offsetting positions relate to contracts prescribed by the Clearing House as eligible for inter-exchange cross margining.
7.22A.1.2 The Clearing Member ensures that the risk-offsetting positions are carried in the accounts belonging to the same Third Party (including a Customer) in which the same Third Party is the legal and beneficial owner. For the avoidance of doubt, inter-exchange cross margining is not allowed for positions carried in accounts opened by the same Third Party with different Clearing Members.
7.22A.1.3 The Clearing Member provides for the right of set-off in respect of the Third Party's (including a Customer's) positions with the Clearing House and any other clearing house in its contractual agreements with that Third Party.
7.22A.1.4 The Clearing Member continues to calculate the counterparty risk requirement for each counterparty exposure to the Third Party (including a Customer) as if margin credit had not been granted.
7.22A.1.5 The Clearing Member, except in the case of a Bank Clearing Member, continues to maintain adequate liquidity facilities (bank lines and cash balances) to fund the gross margins payable to the Clearing House and any other relevant clearing houses.
7.22A.1.6 The Clearing Member, except in the case of a Bank Clearing Member, imposes a limit on the amount of margin credit granted to the Third Party (including a Customer) which should not exceed 20% of such Clearing Member's free financial resources.
7.22A.1.7 The Clearing Member, except in the case of a Bank Clearing Member, has proper internal controls and risk management procedures, as prescribed below, to monitor the credit risk and liquidity risk arising from inter-exchange cross margining:
a. the limit on the amount of margin credit granted to a Third Party (including a Customer) must be set, approved and regularly reviewed by an authorised staff independent of trading, dealing or marketing functions;
b. in setting the limit on the amount of margin credit granted to a Third Party (including a Customer), the Clearing Member must take into account possible maintenance margin calls and Settlement Variation losses to be paid to the Clearing House and any other relevant clearing house;
c. the Clearing Member must strictly observe the limit on the amount of margin credit granted to each Third Party (including a Customer); and
d. the Clearing Member must ensure that it has proper systems and control procedures to monitor, on a daily basis, the usage of the margin credits and the adequacy of its liquidity facilities (bank lines and cash balances) to meet obligations arising from positions held with the Clearing House and any other relevant clearing house, including:
i. daily monitoring of each Third Party's (including a Customer's) intra-day and end-of-day use of margin credits to ensure that the limit on the amount of margin credit granted is not breached;
ii. daily monitoring of all Third Parties' (including Customers') aggregated intra-day and end-of-day use of margin credits to ensure that the Clearing Member's liquidity facilities (bank lines and cash balances), after setting-off the Third Parties' aggregate use of margin credits, are adequate to meet the potential mark-to-market loss for positions carried at any relevant clearing house (excluding the Clearing House), as well as potential mark-to-market loss equivalent to at least two (2) times the maintenance margin for positions carried with the Clearing House;
iii. reports used for intra-day and end-of-day monitoring are generated in a timely manner and have the following information:
• limit on amount of margin credit granted to each Third Party (including a Customer);
• amount of margin credit used by each Third Party;
• aggregate limit on amount of margin credit granted for all Third Parties;
• aggregate amount of margin credit used by all Third Parties;
• available liquidity facilities (bank lines and cash balances);
• excess liquidity facilities (bank lines and cash balances) after setting off the Third Parties' aggregate use of margin credits;
and
iv. remedial procedures are in place should there be any breach of controls, limits and thresholds.
7.22A.1.8 The Clearing Member must notify the Clearing House if it decides to offer the inter-exchange cross margining arrangement to Third Parties (including Customers), that it has complied with, and shall continue to comply with the conditions stated in Rule 7.22A.
7.22A.1.9 The Clearing House reserves the right to impose additional conditions or disallow a Clearing Member from offering the inter-exchange cross margining arrangement if it is not satisfied with the internal controls and risk management procedures of the Clearing Member requesting inter-exchange cross margining.
Added on 22 September 200622 September 2006 and amended on 10 August 200710 August 2007.