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National Clearing Company of Pakistan Limited

National Clearing Company of Pakistan Limited. An Overview. Company Overview. BACKGROUND. NCCPL – NCSS Design In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS).

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National Clearing Company of Pakistan Limited

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  1. National Clearing Company of Pakistan Limited An Overview

  2. Company Overview

  3. BACKGROUND NCCPL – NCSS Design • In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS). • Accordingly various committees were formed comprising of representatives from the three Stock Exchanges, CDCPL and other Stake Holders. • Based on recommendations submitted by consultants, deliberation of the committees and subsequent approvals from the three Stock Exchanges and SECP and Stake Holder’s System design was finalized in October 2000.

  4. BACKGROUND NCCPL - Incorporation & Implementation • The NCCPL was incorporated on July 03, 2001 to provide Independent Clearing & Settlement Services to all the three Stock Exchanges in Pakistan. • NCSS Live operations were commenced from December 24, 2001. • Effective from July 01, 2005, the Company managing its affairs independently.

  5. Organizational Structure

  6. Legal Framework • NCCPL Operations are governed by: • NCSS Regulations 2003 • NCSS Procedures 2003 • Clearing House Companies (Registrations and Regulations) Rules 2005 • Companies Ordinance, 1984

  7. Corporate Governance • Board of Directors The Board of the Directors comprises of 11 Directors of which 9 are appointed by the shareholders,1 is nominated by the SECP and the CEO by virtue of his office. • Code of Corporate Governance • The Company has voluntarily adopted the Code of Corporate Governance to implement good governance practices. These inter-alia include: • Forming an Audit Committee of the Board comprising of non-executive directors. • Appointment of Chief Internal Auditor, Chief Financial Officer and Company Secretary by the Board. • Holding the number of the Board Meetings as recommended by the Code. • Issue of Quarterly, Half yearly and annual financial statements.

  8. NCCPL Shareholding Structure

  9. Company’s Achievements Following major achievements have been accomplished by the Company: • Independent management. • Registration under Clearing House Companies (Registration and Regulations) Rules 2005 on March 7th, 2006. • Appropriation of Rs 100 million as initial contribution towards Clearing and Settlement Fund as required by the above Rules. • Formation of Clearing & Settlement Fund Trust. • Successful implementation of Unique Identification Number (UIN) functionality on the National Clearing & Settlement System (NCSS). • Recording & Settlement of Futures Market Contracts Through NCSS.

  10. Company’s Achievements • Introduction of mechanism for Cash Settled Future Contracts (CSFC) to collect and disburse marked-to-market losses and profit through its NCSS Pay & Collect Functionality. • Implementation of Institutional Delivery System (IDS) functionality so as to enable Institutions for Clearing and Settlement of their trades/transactions based on ready market, CFS market and Future market directly through the National Clearing and Settlement System (NCSS). • Implementation of Financial Institutions Margining System. • Implementation of CFS MK-II through NCCPL. • Settlement of Odd Lot Market Trades through NCSS

  11. Company’s Achievements • Pay & Collect functionalities for Stock Index Future Contracts (“SIFC”) • Automated Handling of Corporate Actions of CFS Financed Securities • Modifications in NCSS to facilitate Unified Trading System (UTS) Platform for LSE and ISE members for execution of their trade and transaction on the same unified trading System (UTS). • Establishment of DR/BC site along with Branch Office.

  12. Future Projects Following are the major upcoming future ventures: • Implementation of Securities Lending and Borrowing through NCCPL. • Clearing, Settlement and Risk Management of Debt Instruments through NCSS

  13. National Clearing & Settlement System (NCSS) Overview

  14. Major Benefits of NCSS • Automated Pay & Collect. • Cross Exchange Netting for both cash & securities for CMs who are members of more than one Stock Exchange. • No physical receipt / issuance of instruments. • Automated process of securities settlement directly between CMs. • Settlement of non-broker institutions for Regular and Future market trades and CFS market transactions directly with NCSS.

  15. MajorBenefits of NCSS • Settlement of broker to broker transactions directly with NCSS to facilitate transactions of brokers of different exchanges. • Margin Financing through independent module on NCSS. • Settlement of net obligations directly between CMs as per undisclosed Balance Orders. • Registration of Unique Identification Number (UIN) of all clients with codes.

  16. NCSS - Operational HighlightsHighest Ever

  17. Active Clearing Members in NCSS

  18. Eligible Securities in NCSS

  19. Statistics

  20. Types of Trades/Transactions on NCSS Broker to Broker (BTB) BTB module facilitates Broker CMs in settling their inter-exchange transactions. Whereby a Broker CM, based on his underlying exchange trade, initiates BTB transactions while the other Broker CM affirms such initiated trades. Once a transaction is affirmed, the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM. Initiation Process A BTB transactions can only be initiated by Broker CM of one Exchange to the Broker CM of another Exchange for affirmation; Affirmation Process A counter Broker CM can affirm the initiated transactions. However, the affirming Broker CM cannot edit the details of transactions posted by the initiating CM. Upon affirmation the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM.

  21. Types of Trades/Transactions on NCSS Institutional Delivery System (IDS) IDS module facilitates Broker CM and Non-Broker CM to settle their Ready Market directly through NCSS. Once a transaction is affirmed by NBCM, the settlement obligation of the initiating BCM is transferred to such affirming Non-Broker CM. Initiation Process IDS Transactions shall automatically be initiated by NCSS and available on real time basis to NBCM(s) for affirmation. Affirmation Process Upon affirmation of such Trades/Transactions, the settlement obligation of the Initiating Broker CM is transferred to the affirming Non-Broker CM.

  22. Buying Broker Selling Broker T Execution of Trades at the Stock Exchange Generation of NE Transactions Online trade feed to NCSS Netting of trades Payment orders and Delivery Receive order Money Receive orders and Delivery order Delivery of NCSS eligible securities (with blocked status) T+1 SD -1 Buying Broker Selling Broker Unblocking of securities on Payment / Delivery Confirmation Payment to NCSS Collect Payment Release Payment Settlement Flow in NCSS T+2 SD

  23. Balance Order Balance Orders in NCSS are computed on net basis for the following transactions of a Clearing Member: Exchange Trades/Transactions • Regular Market Trades Non-Exchange Transactions • Broker To Broker (BTB) • Institutional Delivery System (IDS) • Margin Financing (MF)

  24. Balance Order Netting Mechanism Balance Order (BO) is based on Multilateral Netting Mechanism prioritized as under: • Netting of sell and/or buy positions of CM having multiple Exchange memberships. • Sell and buy positions matched among CMs of same Exchange. • Remaining sell buy positions are matched among CMs of different Exchanges.

  25. Delivery Default Management • CM’s who fail to deliver securities till 4:15 PM to be considered on delivery defaulter. • Failed deliveries are reported to respective Exchange for squaring-up. • Respective Exchange to square-up failed deliveries by 12:00 AM next Trading Day. • Buying CMs who have already made the payments will get failed deliveries by 2:00 PM, if on next Trade Day subject to Square-Up. • In case of non-square up such failed delivery shall be closed-out on SD+1 whereby buyer will get market value on the basis of highest system price i.e. SD-1 to SD+1.

  26. NCSS Pay & Collect • CMs having payable, to pay by 12:00 noon on Settlement Date. • CMs having receivable, to receive by 1:30 PM, provided they discharged all their delivery obligations. • CMs becoming liable due to short delivery reverses to pay by 4:10 PM. • In case of money default, NCCPL shall apply money default procedures. • Remaining CMs having to receive payments by 4:30 PM. • Settling Banks to online confirm payments & collections through NCSS by the Designated Time.

  27. NCSS Pay & Collect Advantages of NCSS Pay & Collect: • Automated money settlements. • Same day credits to CMs. • Settlement of amount net of clearing obligations, squaring-up obligations and Tariff etc. • Single net settlement for CMs who are members of more than one Stock Exchange. • Disbursement of profits and losses of Mark to Market Losses of Cash Settle Future Contracts • Disbursement of weekly/monthly profits of Future Market Contracts

  28. Money Default Management Non-Payment by a Clearing Member (CM): • Payment should be made by CM on the settlement day till the specific time. • Payment Notice of 30 minutes shall be delivered in case of non-payment. • Suspension or restriction in case of failure to comply with said notice

  29. Default Management • Where CM fails to settle its money obligation on a settlement day by 12 noon, the NCCPL shall issue a 30-minutes notice to such CM. • Where such CM fails to settle its money obligation within 30-minutes, the NCCPL shall suspend such CM and this information shall be disseminated to all the Stock Exchanges. • The respective Stock Exchange(s) shall also suspend such CM in all markets (in case he is a BCM). • The NCCPL shall take following steps to complete the settlement:

  30. Default Management • Bought securities which are delivered to such CMs’ CDS main accounts in blocked status shall be retrieved by NCCPL. • In case of CFS Financier the securities held in the CDC Blocked Account shall with immediate effect stand transferred in the name of NCCPL. • Funds constituting 50% of the security deposit and NCC Clearing & Settlement Fund shall be utilized in accordance with the Regulations. • In case of NBCM, Collateral held against exposure margins and MTM losses will be utilized. • NCCPL shall arrange financing against the retrieved securities and securities deposited as collateral (in case of NBCM). • The NCCPL shall ask the relevant Stock Exchange (s) to provide the shortfall amount as per their regulations. • If the cumulative amount mentioned above is not sufficient, the NCCPL shall hold the proportionate amounts according to the receivables due to all Clearing Members on that settlement day.

  31. Default Management • In order to proceed further the NCCPL shall refer the case to the Default Management Committee which comprises of the MD and Chairman of the relevant Exchange and NCCPL and nominee from Banking Association and MUFAP. • In consultation with the aforementioned Committee, the NCCPL shall net-off all unsettled positions of all the market in each security and determine the security-wise net positions for squaring-up/closed-out. • The NCCPL shall square-up the securities in the ready market of the relevant exchange.

  32. Default Management • Where the shortfall still remains after the completion of squaring-up procedure the NCCPL shall after determining the final loss serve a Final loss Notice to such suspended CM. • Where the suspended CM fails to comply with the said notice, the NCCPL shall declare it to be a Defaulting CM. • Consequently, the relevant exchange(s), shall also declare such CM (in case of a BCM) to be a defaulter in all markets.

  33. Default Management • After the declaration of default, the assets of such defaulting CM (in case of a BCM) under the control of relevant stock exchange such as Membership Card and Room etc shall be liquidated and the proceeds shall be proportionately allocated to all the markets. • In the event there are still unmet losses, the NCCPL shall determine the balance amount exchange-wise, market-wise and security-wise after applying netting mechanism as per the NCSS Regulations. • After determination of the final loss of such CM or BCM, as the case may be, it will be allocated on a pro rata basis, as per the mechanism set out in NCSS Regulations, to all the concerned CMs. • NCCPL shall recover such allocated losses from all those CMs who were involved in exchange trades, exchange transactions and non-exchange transaction in the security which caused losses to the defaulter CM, in proportion to their gross trading volume in such security

  34. Other Risk Management NCSS Controls and Checks Movement of Securities: Bought securities are delivered to buying CMs’ CDS main accounts in blocked status. Blocked securities are available to buying CMs’ CDS main accounts after discharging their obligations. Short Deliveries Debits: In case of short deliveries by 3:30 PM, system additionally debits CMs’ accounts with the previous day Closing Prices (i.e., System Prices) with 15% margin of late/fail deliveries. Retrieval Securities: In case of money default by CM, blocked securities in his CDS main account are retrieved by NCCPL for selling-out.

  35. UIN Functionality

  36. Client Types in NCSS • Individual Pakistani Citizen • Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan • Non-individuals • Corporate/individual - Broker • Corporate – Company • Corporate – fund/other organization

  37. UIN Registration Details • Client Name • Appropriate UIN • Client Code/Client ID issued by the Broker • Client Type

  38. Modus Operandi of UIN Functionality • All members of the exchanges will enter the registration details along with their client codes through the mapping table on National Clearing & Settlement System (NCSS). • All the registration details will be provided to the Stock Exchanges at end of day. • Stock Exchanges will link up the registration details with the trading systems at their end and it will be mandatory for the members to enter client code / ID while placing any order in the trading system. • The trading systems of the stock exchanges will verify the client code / ID with the UIN registration details on Pre-trade basis and will reject any order failing this validation.

  39. Modus Operandi of UIN Functionality Client Type- Individual Pakistani Citizen • The Broker Clearing Member (BCM) will first select Client Type “Individual Pakistani Citizen” • The BCM then enter the CNIC of a client along with the relevant details (other than name) • If the CNIC exists in the UIN Database, the name of such client will appear automatically and the BCM can Save/Past such record • If the CNIC does not exists in the UIN Database, then the BCM will also enter the name of such client. Upon saving, such record(s) will be marked with status “PENDING” • The records with status “PENDING” will be displayed in the Admin List Screen for approval or rejection by the Company

  40. Modus Operandi of UIN Functionality Client Type- Individual Pakistani Citizen • The Company will verify the CNIC from a system, provided by NADRA and mark the status “APPROVED” for valid CNIC. In case, where CNIC does not verify from the NADRA , this will be marked with status “REJECTED” • The BCM can see the reasons for each rejected record in the UIN Setup Screen and can change the UIN and Name of such unverified record and resubmit to the Company for verification • The Company will follow the same process of verification as mentioned above • The “APPROVED” records will become part of UIN Database • The same scheme will be applicable where the joint holder accounts are created

  41. Modus Operandi of UIN Functionality Client Type -Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan • The Broker Clearing Member (BCM) will first select Client Type “Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan” • The BCM then enter the UIN of a client along with the relevant details (other than name) • If the UIN exists in the UIN Database, the name of such client will appear automatically and the BCM can Save/Past such record • If the UIN does not exists in the UIN Database, then the BCM will also enter the name of such client. • The BCM shall also submit the attested copies of UIN documentary evidence to the Company

  42. Modus Operandi of UIN Functionality Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan • The Company will verify the UIN from the documentary evidence and mark the status “APPROVED” for valid record. In case, where UIN does not verify from the document, this will be marked with status “REJECTED” • The “APPROVED” records will become part of UIN Database • The same scheme will be applicable where the joint holder accounts are created

  43. Modus Operandi of UIN Functionality Client Type- Non-individuals • The Broker Clearing Member (BCM) will first select the category from Client Type “Non-individuals” • The BCM then search the Name of a client from UIN Database • If the Name exists in the UIN Database, the UIN and Name of such client will appear automatically and the BCM can Save/Past such record • If the Name does not exists in the UIN Database, then the BCM shall submit its request to the Company on prescribed format along with the UIN documentary evidence duly attested by the BCM

  44. Modus Operandi of UIN Functionality Client Type- Non-individuals • The Company shall verify the UIN and Name from the documentary evidence provided by the BCM. Upon verification, the Company shall incorporate such information in the UIN Database and the BCM can register such client through a process mentioned above • The Company may, however, reject any such record(s), and such information shall not be included in the UIN Database. • The same scheme will be applicable where the joint holder accounts are created

  45. Over View of Institutional Margining System

  46. IDS module facilitates Broker CM and Non-Broker CM to settle their Ready Market Trades directly through NCSS. Once a transaction is affirmed by NBCM, the settlement obligation of the initiating BCM is transferred to such affirming Non-Broker CM. Initiation Process Under the new Margining System, IDS Transactions shall automatically be initiated by NCSS and available on real time basis to NBCM(s) for affirmation. Affirmation Process Upon affirmation of such Trades/Transactions, the settlement obligation of the Initiating Broker CM is transferred to the affirming Non-Broker CM. Institutional Margining System

  47. NBCMs should have to open their CM account with NCCPL. • After admission as NBCM, FIs become eligible to affirm IDS Transactions based on Ready Market Trades. • Upon affirmation of IDS Transactions, NCCPL shall collect Margins against Exposure and Mark-to-Market (MTM) losses on Value at Risk (VaR) based method from NBCMs. Institutional Margining System

  48. All NBCMs are required to pay Collaterals against Exposure Margins & MTM losses to NCCPL on the same day as per Designated Time Schedule (DTS). • Collaterals shall be in the form of Cash, Approved NCSS Eligible Securities /Eligible Term Finance Certificates (TFCs) and Bank Guarantee or Irrevocable Undertaking (only for Commercial Banks/Development Financial Institutions having AA credit rating & higher and Public Sector Entity Controlled by the Govt. of Pakistan duly approved by the Board). • On the basis of Pre-Trade Risk Management System, all BCMs would continue to pay Collaterals to the Exchanges on Ready Market Trades executed on behalf of FIs. Institutional Margining System

  49. Once the FIs deposit their Collaterals against affirmed IDS Transactions, NCCPL shall provide the Broker side information of such underlying Trades/Transactions to the relevant Exchange(s). • The Exchange(s) will adjust the Exposure Margins & MTM losses of their respective Brokers based on the information provided by NCCPL. Institutional Margining System

  50. The role of Settling Banks (SBs) becomes more important when NBCMs opt to make payment of Collateral in the form of Cash. • Cash should be deposited in the Bank account of NCCPL, maintained in the designated branches of Settling Banks, as per the DTS by the NBCM(s). • For the confirmation of Cash deposited by the NBCM(s), deposit slip should have the “POSTED” stamp over leaf, duly signed by the authorized staff of the Settling Banks. • The Settling Bank should immediately credit the NCCPL’s Bank account with the deposited amount, after stamping and signing the deposit slip. • Submission of deposit slips bearing “POSTED” stamp and duly signed by the authorized staff of Settling Banks should be considered as Payment of Cash deposited by the concerned NBCM(s) Deposit of Collateral as Cash

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