| 1. | VASPs providing VA Transfer and Settlement Services must have legally enforceable rules in the event of a client being, or appearing to be, unable to meet its obligations in respect of one or more transmission, transfer and/or settlement, which enable action to be taken in respect of the unsettled transmission, transfer and/or settlement to which the client has undertaken obligations or is a party (“Default Rules"). |
| 2. | Such Default Rules must be appropriate, and demonstrate due consideration, for all risks given the nature of transmission, transfer and/or settlement, including but not limited to the following—
| a. | effecting any close-out transfers of a defaulting client's assets or positions (as applicable) to the VASP or a non-defaulting client; | | b. | the application of the proceeds of liquidation and/or other funds and assets of the defaulting client; | | c. | the use of a default contribution fund mechanism pertaining to clients' pre-funded contributions becoming applicable in the event of a default; | | d. | all remaining rights and liabilities of the defaulting client in respect of an unsettled transmission, transfer and/or settlement; | | e. | segregation and portability arrangements, including the method for determining the value at which client positions will be transferred; | | f. | provisions ensuring that losses that arise as a result of any default do not threaten the solvency of the VASPs providing VA Transfer and Settlement Services, and that the VASP can continue to provide the services and carry out the activities; and | | g. | restriction of any further transmission, transfer, trade or termination of a client's access to the VA Transfer and Settlement Services in the event of such client's failure to meet its obligations in respect of one or more transmission, transfer or trade.
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| 3. | The Default Rules shall 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 VASP providing VA Transfer and Settlement Services; | | b. | the method for identifying a default, including any automatic or discretionary default scenarios, and how the discretion is exercised in any relevant default scenarios; | | c. | potential changes to the normal settlement practices in a default scenario; | | d. | the management of transmissions or transfer at different stages of processing a transmission, transfer and/or settlement; | | e. | the treatment of Client Money and/or Client VAs; | | f. | the probable sequencing of actions that the VASP providing VA Transfer and Settlement Services will expect to take under the Default Rules; | | g. | the roles, obligations and responsibilities of various parties, including the VASP providing VA Transfer and Settlement Services, the defaulting client and non-defaulting clients; | | h. | how to contain the chain effect of the defaulting client's obligations and its implications in the wider ecosystem including, but not limited to, other clients of the VASP; | | i. | how to address the allocation of any credit losses it may face, as a result of any individual or combined default, and how stress events are dealt with; | | j. | any other mechanisms that may be activated to contain the impact of a default, including—
| i. | whether the VASP maintains a default contribution fund, whereby defaulting and non-defaulting clients' or participants' pre-funded contributions are applied to cover the losses or shortfalls resulting from a default on the basis of a predetermined order of priority; and | | ii. | a resolution regime of the defaulting participant, involving ‘porting' or transferring the open positions and margin related to client transactions to a non-defaulting participant, receiver, third party or bridge financial company.
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| 4. | Default Rules should be reviewed and tested at least annually, or following material changes to the rules and procedures, to ensure that they are practical and effective.
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