Clearing and Settlement of spot bonds 03 February 2005 Brett Kotze

1. Clearing and Settlement of spot bonds 03 February 2005 Brett Kotze

2. The New Model Matching NEW SAFEMS Clearing Members Derivatives Trade for margin Icon Spot trades Matching STRATE Settlement agents

3. Process flows CLEARING MEMBER COMMUNICATION JSE SETTLEMENT AUTHORITY COMMUNICATION MONITOR COMMITS MARGIN REQUIREMENT ENTERS CORRECTIVE TRADES PENALTIES (RECONCILES TRADES WITH MATCH ORDERS RECEIVED FROM STRATE YIELD-X CLEARING SYSTEM TRADE FOR MARGIN TRADING MEMBER TRADING ENGINE ICON COMMIT INTIMA- TIONS MATCH ORDER NO MATCHED TRADE TRADE LEG STRATE CLIENT TRADE AFFIRMATION TRADE AFFIRMATION Net SETTLE- MENT POSITION COMMIT SETTLEMENT AGENT

4. 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

5. 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

6. Timelines

7. Clearing House (SAFCOM) GCM DCM NCM Investor Investor Investor Risk Management Structure Historically MARKET RISK CREDIT RISK

8. 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.

9. 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

10. Clearing House GCM DCM NCM Investor Investor Investor Risk Management Structure SETTLEMENT RISK

11. 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.

12. 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

13. Initial Margin versus Settlement Margin • Offset between a Derivative and a Forward Bond where correlation exists • Long Derivative • Short Forward Bond = Offset = Initial Margin (Market Risk) S-3 Obligations are separated Long Derivative = Initial Margin (Market Risk) Short Spot Bond = Settlement Margin (Settlement Risk) • Offset between Bonds • Long Forward Bond R152 • Short Forward Bond R186 = Offset = Initial Margin (Market Risk) S-3 Obligations are separated Long Spot Bond R152 = Settlement Margin Short Spot Bond R186 = Settlement Margin

14. 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

15. Trading Members / Clients • Financial Instrument Principal (FIP) • Principal Transactions • Financial Instrument Traders (FIT) • Principal Transactions • Member Settled clients • Non-Member Settled clients

16. 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

17. Questions