COLL 7.3.7 Spread for OTC Derivatives—QFC Retail Schemes

(1) The operator of a QFC retail scheme must ensure that the exposure to a single counterparty in an OTC derivative transaction does not exceed 10% in value of the scheme property.

Note OTC derivative is defined in the glossary.
(2) In calculating a limit under this rule, the exposure in relation to an OTC derivative may be reduced to the extent that collateral is held in relation to it if the collateral meets all the following requirements:
(a) it is marked-to-market on a daily basis and its value exceeds the amount at risk;
(b) it is exposed only to negligible risks (for example, risks for government bonds of first credit rating or cash) and is liquid;
(c) it is held by a third-party custodian not related to the provider or is legally secured from the consequences of a failure of a related party;
(d) it can be fully enforced by the QFC retail scheme at any time.

Note Collateral is defined in the glossary.
(3) In calculating a limit under this rule, OTC derivative positions with the same counterparty may be netted if the netting procedures—
(a) correspond as closely as possible to—
(i) the off-balance sheet netting procedures required to be used by an authorised firm under BANK, Division 4.5.E; or
(ii) substantially equivalent provisions under the law of another jurisdiction; and
(b) are based on legally binding agreements.

Guidance for para (a) (ii)

Substantially equivalent provisions would include the conditions in the Banking Consolidation Directive (the Directive of the European Parliament and Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (No 2006/48/EC)), annex III, part 7 (Contractual netting (Contracts for novation and other netting agreements)).
(4) In applying this rule, a derivative transaction is taken to be free of counterparty risk if—
(a) it is performed on an exchange; and
(b) it is cleared through a clearing house that meets both of the following requirements:
(i) the clearing house is backed by an appropriate performance guarantee;
(ii) the clearing house is characterised by a daily mark-to-market valuation of the derivative position and at least daily margining.
Guidance on spread generally

The operator of a QFC retail scheme should particularly note rule 7.3.7 (2) (d) under which collateral has to be legally enforceable at any time. The Regulatory Authority, therefore, expects the operator to undertake legal due diligence before entering into any financial collateral arrangement. This is particularly important if the collateral arrangement has a cross-border dimension. The Regulatory Authority also expects the independent entity to exercise reasonable care to review collateral arrangements in accordance with its functions.
Amended by QFCRA RM/2014-3 (as from 1st January 2015)