Meaning
Auxiliary legal contracts define the terms under which a non-clearing member accesses the services of a general clearing member to settle trades. These documents establish the operational boundaries, margin requirements and liability allocations between the two financial entities. A standard ancillary clearing agreement is executed alongside the main clearing house rules to govern specific sub-accounts or asset classes.
It does not govern the primary relationship between the clearing house and its direct clearing members.
Participant Obligation
The non-clearing member must maintain sufficient collateral with the clearing member to cover the risks of its open positions. This collateral is adjusted daily through variation margin calls to reflect market price movements. Under the terms of a standard ancillary clearing agreement, the participant must also provide regular financial statements and risk reports to the clearing member.
These obligations are designed to protect the clearing member from the default of the participant.
Clearing Process
Trades executed by the non-clearing member are routed to the clearing member for registration and settlement at the central clearing house. The clearing member acts as the guarantor for these trades, assuming the performance risk toward the central counterparty. The standard ancillary clearing agreement specifies the technical standards and deadlines for submitting trade data to ensure timely processing.
If a trade is rejected by the clearing house, the clearing member has the right to refuse to clear it. This routing process must be completed within minutes of execution to prevent settlement delays.
Financial Indemnity
The participant must indemnify the clearing member for any losses or costs resulting from its trading activities. This indemnity is secured by the collateral held by the clearing member and can be accessed immediately in the event of a breach. It provides the legal basis for the clearing member to liquidate the participant’s positions during a default.
