clearing and settlement of spot bonds 03 february 2005 brett kotze

Clearing and Settlement of spot bonds

03 February 2005

Brett Kotze

The New Model

Matching NEW SAFEMS Clearing Members

Matching STRATE Settlement agents

Trade for margin

Icon

Spot trades

Derivatives

Process flows

JSE SETTLEMENTAUTHORITY

ICONTRADINGENGINE

TRADINGMEMBER

CLIENT

CLEARINGMEMBER

YIELD-XCLEARINGSYSTEM

STRATE

SETTLEMENTAGENT

TRADE AFFIRMATION

PENALTIES

(RECONCILES TRADESWITH MATCH ORDERSRECEIVED FROM STRATE

COMMUNICATION

MONITOR COMMITS

EN

TE

RS

C

OR

RE

CT

IVE

TR

AD

ES

TRADE FOR MARGIN

MATCHED TRADE

TRADE AFFIRMATION

MA

RG

INR

EQ

UIR

EM

EN

T

MA

TC

HO

RD

ER

NO

CO

MM

ITIN

TIM

A-

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NS

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Net

SE

TT

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Principles• CENTRAL ORER BOOKS = Anonymous orders matched on the central order book on the basis of

time-price priority. This includes bonds and carry’s. These are guaranteed by SAFCOM subject to challenge and price

discovery of the central order book.

• REPORTED TRANSACTIONS =Reported Transaction where terms and/or price are agreed

(GUARANTEED) Off-Exchange and transaction is booked for reporting and settlement purposes. Clearing Members may accept these for

risk management purposes following which SAFCOM will guarantee settlement.

• REPORT TRANSACTIONS = Report Only Transaction where terms and/or price are agreed

(NOT GUARANTEED) Off-Exchange and transaction is booked for reporting and settlement purposes, not accepted by the Clearing Member

for risk management purposes, will not be guaranteed by the SAFCOM

• CYCLES = Will be T+3 Rolling Contractual Settlement, except for :

- Correction Trades (Equal & Opposites)

- SLB or Carry’s to secure settlement

Principles (Cont.)

• ALLOCATIONS = On T, late allocations and allocation corrections done by Settlement Authority

• UNCONDITIONAL COMMIT= Settlement Agents commits become unconditional at 12h00 on T+2 unless provisional sequestration

T3

TRADE

TRADE TO STRATE

NET SETTLEMENT POSITION TO CSDP's

MARGIN POSITION

BILLING REPORT

MARGIN PAYMENT

COMMIT BY CSDP

MONITOR FOR COMMIT

REVALUE MARGIN POSITION

BILLING REPORT

TOP-UP MARGIN

TRADE MEMBER MANAGEMENT

JSE SETTLEMENT AUTHORITY MANAGEMENT

FAILS MANAGEMENT (GIVE-UPS)

SETTLEMENT

12H00

T2

12H00 14H00 16H00

T T1

Timelines

Risk Management Structure Historically

NCMNCM

Clearing House

(SAFCOM)

Clearing House

(SAFCOM)

DCMDCM

InvestorInvestor

InvestorInvestor

InvestorInvestor

GCMGCM

MARKET RISK

CREDIT RISK

Definitions

Market Risk

The risk that adverse price movements in the level or volatility of a price may create an anticipated loss. For example, a dramatic change in the interest rate

during one day may create the risk of loss.

Credit Risk

The risk that a counterparty will not settle an obligation for full value, either when due or at a time thereafter.

But what about settlement risk?

The guaranteeing of settlement of loan stock by SAFCOM brings in a new element of risk to SAFCOM, settlement risk

Defined as: -

The risk that a party will default on one or more settlement obligations due to no funds or securities

Risk Management Structure

NCMNCM

Clearing HouseClearing House

DCMDCM

InvestorInvestor

InvestorInvestor

InvestorInvestor

GCMGCM

SETTLEMENTRISK

Risk and Margin Methodology

MARKET RISK: - The Calm methodology was developed specifically for Yield-X. It is a conventional VaR (Value at Risk) calculation. The parameters which Yield-X uses in this calculation are one trading day (the loss is estimated over

the period to the end of the next trading day) and 99.95% confidence level, which equates to Initial Margin.

SETTLEMENT RISK: - Using the Calm methodology with the resultant figure computing to points per instrument, and applying rands per point, which

equates to Settlement Margin.

Market Risk versus Settlement Risk

MARKET RISK

•Where offset is allowed between Forward Bonds•Where offset is allowed between Derivatives and Forward Bonds•All Derivative products•Forward Bonds

SETTLEMENT RISK

•Where there is SFIDvP•Only on S-3 of the transaction

Initial Margin versus Settlement Margin

• Offset between a Derivative and a Forward Bond where correlation exists

Long DerivativeShort Forward Bond

= Offset = Initial Margin (Market Risk)

S-3 Obligations are separatedLong Derivative = Initial Margin (Market Risk)Short Spot Bond = Settlement Margin (Settlement Risk)

• Offset between Bonds

Long Forward Bond R152Short Forward Bond R186

= Offset = Initial Margin (Market Risk)

S-3 Obligations are separatedLong Spot Bond R152 = Settlement Margin Short Spot Bond R186 = Settlement Margin

Initial Margin versus Settlement Margin

• The calculation for both Initial Margin and Settlement Margin will be computed and the higher of the 2 will be taken on S-3

• The unsettled position will be Marked-to-Market on EOD T+1, any short-fall will be requested as a Top-up Margin

• The Settlement Margin will be used as the Sweetener for Fails Management, i.e. Give-ups. Where Initial Margin is held (higher of the 2), surplus will be returned to the Clearing Member

Trading Members / Clients

• Financial Instrument Principal (FIP)

Principal Transactions

• Financial Instrument Traders (FIT)

Principal Transactions

Member Settled clients

Non-Member Settled clients

Securities Lending & Borrowing

• SETTLEMENT AGENT SECURITIES LENDING AND BORROWING (SLB)

Settlement Authority will book

Identified as SLB on STRATE and Settlement Agent systems

• SETTLEMENT AUTHORITY

Lender of last resort

Identified as SLB on STRATE and Settlement Agent systems

Questions