Clearing house role in settlement risk management

1
Clearing house role in settlement risk management
National Depository for Securities (KDPW)
2
Clearing house role in settlement risk management

• Clearing house / CCP model
• KDPW as CCP
• Risk management tools
• Measures undertaken in case of a system
  participants default

3
Clearing house/ CCP model

• Clearing vs. Central Counterparty Clearing
• Central Counterparty features
• Risk taking organization interposing itself
  between counterparties to traded instruments
• Multilateral clearing facility allowing for
  trading parties anonymity
• Market counterparty of unquestioned
  creditworthiness
• Provides market integrity by setting standards
  for risk assessment and risk mitigation

4
Clearing house/ CCP model

• Central Counterparty Clearing benefits
• Centralised counterparty credit risk management
  default mitigation
• Multilateral netting of gross market risk down
  to significantly lower levels of net market risk
• Neutral transparent valuation of open positions
• Full collateralisation of the remaining net
  market risk
• Process standardisation

5
Clearing house/ CCP model

• Central Counterparty protection mechanisms
• Capital requirements for participants
• Deposits (i.e. variation initial margins,
  intraday margin calls)
• Guarantee (clearing) funds
• CCP capital
• Insurance
• Parental guarantees
• Guarantee arrangement systems

6
KDPW as CCP

• KDPW acts as CCP for cash and derivatives market
• Technical interposition between transacting
  parties
• Netting (cash side)
• Anonymity of the transacting parties
• Guarantee funds
• Margins (so far for derivatives market)

7
Risk management tools

• Guarantee System
• Risk Monitoring

8
Risk management tools
Capital Requirements - Cash Market Clearing
Members PLN 50 million for banks PLN 4
million for brokerage houses PLN 2,5 million
for brokerage houses trading on their own
account or trading for clients on ATS market

9
Risk management tools
Capital Requirements - Derivatives
Market General Clearing Members PLN 100
million for banks PLN 15 million for brokerage
houses Ordinary Clearing Members PLN 25
million for banks PLN 10 million for brokerage
houses
10
Risk management tools

• Guarantee System For Cash Market
• 2 dedicated settlement guarantee funds for cash
  markets
• Stock Exchange
• CTO
• Special clearing fund for ATS market transactions
• Contribution to the settlement guarantee funds
  based on a participants market exposure
• Cash
• T- bonds
• Daily funds contribution update

11
Risk management tools
Guarantee System for Derivatives Initial Deposit
determines the number of open positions during
one day Mark to Market calculated and settled
daily for every futures contracts Options
Premiums - calculated and settled daily for
every options contract Maintenance Margin
calculated daily after session on the
portfolio basis Guarantee Fund calculated
daily based on the value of the maintenance
margin of each clearing member
12
Risk management tools

• Risk Monitoring - Cash Market
• Monitoring of clearing participants settlement
  activity intraday
• Settlement suspension monitoring
• Settlement support
• Automatic securities lending
• Buy-in procedures

13
Risk management tools
Risk Monitoring Derivatives Market
Initial Deposit is paid upfront (minimum amt is
PLN 100k) Initial Deposit may comprise of -
cash - securities accepted by the NDS - bank
guarantees Maintenance Margin (real time),
Futures MtM and Options Premiums are
recalculated with every trade concluded on WSE
14
Risk management tools
Risk Monitoring Derivatives Market
Transaction limit triggers 90, 95 -
Clearing Member is informed of the degree
to which the transaction limit is used and
increasing the value of initial deposit is
recommended (Margin Call) 100 - the
transaction limit is exhausted, Derivatives
Clearing House has a right to suspend such
Clearing Member Additional initial deposit may
be paid through the payment bank immediately
15
(No Transcript)
16
Default procedures

• Default risk factors
• Lack of financial resources for settlement of
  transactions covered by the guarantee fund
• Paying bank suspension of a participants
  payments
• Withdrawal of a license by The Polish Financial
  Supervision Authority
• Lack of payment of a guarantee fund statutory
  contribution
• Declaration of a participants bankruptcy
• Other situation requiring use of guarantee system
  assets

17
Default procedures

• In the event of default on cash market actions
  are taken in the following order
• Balances due and liabilities of a clearing
  participant are compensated
• Remaining positions are closed out with the use
  of guarantee fund assets in the following order
• Defaulting clearing members contribution to the
  guarantee fund
• The remaining guarantee fund assets
• When the guarantee fund resources are
  insufficient, the clearing members are obliged
  to make additional contribution

18
Default procedures

• In the event of default on derivatives market
  the following actions are taken
• Position transfer
• Position close out with use of the deposits and
  guarantee fund assets
• Initial deposit
• Maintenance Margin
• Defaulting Clearing Members contribution to the
  guarantee fund
• The remaining guarantee fund assets
• When the guarantee fund resources are
  insufficient, the clearing members are obliged
  to make additional contribution

19
What will the future bring?

• Risk management tools further enhancements
• In case of KDPW this will result in
• More sophisticated algorithms for deposits
  calculation on derivatives
• SPAN methodology implementation
• Further regulatory expansion into so far
  unregulated markets
• Roll out of regulated market settlement standards
  onto OTC market - CCP for OTC instruments