Answer 3 questions about multilateral clearing arrangement Case Study

Answer 3 questions about multilateral clearing arrangement - Case Study Example f proprietary transactions of the member, the liquidator can initiate the transfer of all customer positions held by the member in default to other members of good standing, take control or liquidate the defaulting member’s proprietary positions, use the margin and security deposits of the member towards the default. In the event that all of the above are still insufficient to cover the default, the liquidator can still apply other funds such as guaranty funds paid by all members and insurance, if any (Dale 1998, pp. 23-24). Q2 The clearing house does not have a right to institute liquidation proceeding against ‘K’ as of 4:30 pm because there was no default yet. Default is the inability of a party to pay its obligations and in this case, its failure to complete a transfer of funds or securities in accordance with the rules of the clearing house, when it is due. Since there was no demand yet for ‘K’ to pay at 4:30, considering that under this particular clearing house rules the business day ends only at 5 and demand to pay at 7 pm, ‘K’ is not yet considered in default. Due process demands that ‘K’ is notified of its obligations, be given time to contest, and a demand for payment on it be made. Only when payment is due and a party is not able to pay can it be deemed in default and be made subject to a liquidation process. Q3 Initially, the clearing house must impose stringent membership rules on potential participants. These rules must require members to have, not only adequate capital, but also to adhere to strict financial and operational requirements upon admission as members such as maintaining a certain net capital as well as separate customer funds and property from their own funds and property. Moreover, members must also satisfy the clearing house that they are operating under sound risk management control. As a risk management control on the part of the clearing house, it could institute a predetermined threshold for each member, which