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Debt Securities . Clearing, Settlement and Risk Management Functions. Features. Issuer: An entity such as listed company that borrows the money. Principal: The par value or the face value of the debt security payable at maturity.
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Debt Securities Clearing, Settlement and Risk Management Functions
Features • Issuer:An entity such as listed company that borrows the money. • Principal:The par value or the face value of the debt security payable at maturity. • Coupon rate: The stated annual rate of interest that the issuer pays on the principal to the holder of the debt security.
Features • Term:The period of time, usually stated in years, over which the issuer of a debt security has promised to meet its obligations. • Premium Price: When the price of a debt security increases above its face value, it is said to be selling at a premium. • Discount Price: When a debt security sells below its face value, it is said to be selling at a discount.
Features • Accrued Interest: The interest earned by the seller from holding the bond from the last interest payment date until the disposal date is called Accrued Interest. • Determining Accrued Interest:The bonds in secondary market are traded in between coupon payment dates. Therefore, the bond seller must be compensated for the portion of the coupon payment earns for holding the bond since the last payment. The concept will be cleared with the following example:
Features Example: On March 1, 2009, ABC Fund sells a corporate bond with a face value of Rs1,000 and a 7% coupon paid semi-annually. The next coupon payment after March 1, 2009, is expected on June 30, 2009. The accrued interest on the bond will be calculated as follows: • The coupon rate will be divided in half, which gives a rate of 3.5% (7% / 2) and coupon payment will then be Rs. 35 (1,000 X 0.035). • There are 120 days remaining before the next coupon payment, but because the coupons are paid semi-annually, the regular payment period if the bond is 180 days. The seller, therefore, has accumulated 60 days worth of interest (180-120). • Accordingly, the buyer will pay to seller on the settlement date the following: Purchase Price = Rs. 1,000 (Principal outstanding) Interest accrued = Rs. 11.67 Total = Rs 1,011.67
Admission Requirements • Broker Clearing Members (“BCM’s”) and Non-Broker Clearing Members (“NBCM’s”) who meet the eligibility criteria may become Debt Market Clearing Members (“DMCM”) by fulfilling the following requirements: • Admission Form • Board Resolution (for corporates) • Agreement between NCCPL and DMCM • Agreement between NCCPL, DMCM and Settling Bank • Trust Deed (applicable where trustee has appointed) • Security Deposit
Trade Details • All trades executed by BCM’s on Bonds Automated Trading System (BATS) established by the Exchange shall be transmitted to National Clearing & Settlement System (“NCSS”) for further processing. • Debt Market Trades shall be settled through a separate account opened in NCSS on T+1 • The BCM’s shall be responsible for Clearing and Settlement of trades executed for their clients and proprietary account • The trades executed by NBCM’s shall be processed through the Institutional Delivery System (“IDS”) Module established in NCSS
Institutional Delivery System (“IDS”) • IDS module of NCSS facilitates NBCM’s to settle their Debt 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. • In Exchange, NBCMs may directly be trade through brokers’ terminal in the capacity of its Agent. Therefore, in order to automate the entire process, following mechanism will be used for the Auto-Initiation and Auto-Affirmation Process simultaneously:
Institutional Delivery System (“IDS”) Auto-Initiation and Auto-Affirmation Process • NBMCs desirous to trade in the Debt Market will be required to acquire a status of Agent of particular Broker(s) as per the relevant Regulations of the Stock Exchange. • The Stock Exchange will provide necessary information of such Agent ship relation of BCMs and NBCMs to NCCPL. • BCMs will be required to create a Client Code of such NBCM(s) in NCSS as per the existing Unique Identification Number (“UIN”) Module
Institutional Delivery System (“IDS”) Auto-Initiation and Auto-Affirmation Process • Once Client Code is created by BCM in NCSS and confirmation from the Stock Exchange received regarding Agent-ship, such UIN(s) of NBCMs will be marked in NCSS for auto-initiation and auto-affirmation. • Upon execution of trade by such NBCMs through the trading terminal provided by BCM, such executed trade once transmitted in NCSS by the Stock Exchanges shall be auto-initiated and auto-affirmed in NCSS simultaneously. • Such affirmed trades shall be settled by the respective NBCMs directly with NCCPL
Institutional Delivery System (“IDS”) Auto-Initiation and Manual Affirmation Process WhereasNBCMs desirous to trade as a Client of BCM, their respective UINs will not be marked for auto-affirmation, however, such trades will be auto-initiated for manual affirmation by respective NBCMs in NCSS. Initiation Process IDS Transactions shall automatically be initiated by NCSS based on the UIN’s and available on real time basis to NBCM(s) for affirmation. Affirmation Process Upon affirmation of such Trades, the settlement obligation of the Initiating BCM will be transferred to the affirming Non-Broker CM.
Major Benefits of NCSS • Cross Exchange Netting for both cash & securities. • Automated Pay & Collect. • No physical receipt / issuance of instruments. • Automated process of securities settlement directly between CMs.
Major Benefits of NCSS • Settlement of non-broker institutions for Regular/Debt Market Trades directly with NCSS. • Cross Exchange Netting for both cash & securities for CMs who are members of more than one Stock Exchange. • Settlement of net obligations directly between CMs as per undisclosed Balance Orders.
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.
Buying Broker Selling Broker T Execution of Trades at the Stock Exchange (BATS) Online trade feed to NCSS Generation of IDS Transactions Netting of trades Payment orders and Delivery Receive orders Money Receive orders and Delivery order Delivery of securities (with blocked status) T SD -1 Buying Broker Selling Broker Unblocking of securities on Payment Confirmation Payment to NCSS Collect Payment Release Payment Settlement Flow in NCSS SD
Delivery Default Management • CM’s who fail to deliver securities till 4:15 PM to be considered as 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, 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.
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.
Risk Management • NCCPL shall manage the risk of its BCM’s and NBCM’s admitted as DMCM’s in respect of Debt market trades executed and / or affirmed IDS transactions. • NBCMs having Agent Ship arrangement with BCM’s shall pay margins to NCCPL directly instead of BCM’s. • Where NBCMs trade as a Client of BCM’s, in such case, BCM’s will have to pay margins till affirmation of such auto-initiated trades by respective NBCM’s. • Once NBCM’s affirm auto-initiated trades, the margins will be collected from such affirming NBCM’s.
Exposure and Netting NCCPL shall determine the Exposure of DMCM’s by applying the following netting mechanism: • Netting shall be allowed between buy and sell positions in the same Security on the same day for the same client; • Netting shall not be allowed across all the three Stock Exchanges; • Netting shall not be allowed between buy and sell positions of different Securities on the same day even for the same client; and • Netting shall not be allowed across settlement periods even for the same client • NCCPL shall hold such margins till the satisfaction of his settlement obligation on the relevant Settlement Date.
Margin Slabs Margin requirements shall be calculated on the following rule based margin slabs and collected on post-trade basis:
Mark-To-Market Losses • NCCPL shall calculate the Mark-To-Market Losses of DMCM’s on the basis of the Closing Price in the Debt market. • Netting shall be permissible across Debt Market Trades in different Securities for the same client in the same Settlement Date. • NCCPL shall hold such margins till the satisfaction of his settlement obligation on the relevant Settlement Date.
Mode of Collateral DMCM’s may deposit the following mode of collateral against Exposure Margin and Mark-to-Market Losses: • Cash; • Bank guarantees and/or • Irrevocable undertakings (where applicable)
Collection of Collateral NCCPL will calculate Exposure Margins and MTM Losses of BCMs and NBCMs based on their Debt Market Trades on real time basis and collect the demand as per the following Designated Time Schedule (“DTS”). • NCCPL will generate first demand for the collection of Exposure Margin and MTM Losses tentatively at 11:30 a.m. in the Settling Bank Accounts of respective BCMs and NBCMs • NCCPL will update the collateral positions of BCMs & NBCMs and generate second demand for the collection of Exposure Margin and MTM Losses (if any) tentatively at 01:30 p.m. in the Settling Bank Accounts of respective BCMs and NBCMs. • NCCPL will update the collateral positions of BCMs & NBCMs accordingly and generate final demand for the collection of Exposure Margin and MTM Losses (if any) after the close of trading session in the Settling Bank Accounts of respective BCMs and NBCMs.
Deposit of Collateral as Cash • The role of Settling Banks (SBs) becomes more important when DMCM’s opt to make payment of Collateral in the form of Cash. • NCCPL shall collect Cash against Exposure Margins and MTM demands through Pay & Collect module of NCSS by providing exclusive automated collection window to the respective Designated Settling Bank branch of the relevant DMCM’s • Cash may also be deposited in the Bank account of NCCPL, maintained in the designated branches of Settling Banks, as per the DTS by respective DMCM’s. • For the confirmation of Cash deposited by the DMCM’s, deposit slip should have the “POSTED” stamp over leaf, duly signed by the authorized staff of the Settling Banks.
Process of Releasing Cash Deposited Against Margins • DMCM’s may initiate request (on the prescribed format duly signed by authorized person) to NCCPL for release of Cash deposited against Exposure Margins & MTM losses. • Upon receipt of release request, NCCPL shall validate the current Collateral of such DMCM against Exposure Margins & MTM losses. In case of excessive Collateral: NCCPL shall release cash on the same settlement date by issuing the cheque in the name of DMCM. In case of deficiency in the required Collateral: NCCPL shall reject the release request of cash. Such rejected request shall not be re-processed and DMCM’s shall submit new release request, if required.
Prescribed Format for Releasing Cash Deposited Against Margins (To be typed on letterhead of DMCM) The Head of Operations National Clearing Company of Pakistan Limited 8th Floor, Karachi Stock Exchange Building Karachi Stock Exchange Road, Karachi. Subject: Release of Cash Deposited Against Exposure Margin and MTM Losses Dear Sir, You are requested to release Rs.____________ deposited against Exposure Margins and MTM Losses by (Name of DMCM) holding CM Id _________. Regards, __________________ Authorized signatory(ies) Name
Deposit of Collateral as Bank Guarantee • DMCM may also deposit Bank Guarantee as Collateral, on the NCCPL’s prescribed format. • DMCM shall notify NCCPL fifteen Business Days prior to the expiry of the submitted Bank Guarantee. • Bank Guarantee submitted by DMCM shall be retained by NCCPL till its expiry date. However, DMCM may withdraw their Bank Guarantee before the expiry date by giving seven Business Days prior notice to the Company. • In case of withdrawal of Bank Guarantee, DMCM should make necessary arrangements for the provision of other means of Collaterals.
Deposit of Collateral as Irrevocable Undertaking • DMCM’s may also deposit Irrevocable Undertaking as Collateral, on the NCCPL’s prescribed format. • Irrevocable Undertaking is only applicable for Commercial Banks/Development Financial Institutions (DFIs) having credit rating of AA and higher. • Upon receipt of Irrevocable Undertaking, the Company shall make deposit entry, to the extent of amount of Irrevocable Undertaking in the respective DMCM’s account in the system.
Process of Releasing Irrevocable Undertaking Deposited Against Margins • The DMCM may withdraw their Irrevocable Undertaking by giving seven Business Days prior notice to NCCPL. • In case of withdrawal of Irrevocable Undertaking, the DMCM should make necessary arrangements for the provision of other means of Collateral.
Risk Management Related Reports on NCSS Following are the Reports and Downloads that will be available to DMCM’s on NCSS: Reports • Exposure Brief Report • Exposure Summary Report • Demand of Payment Report • System Price Report • Participant Collateral Position Report • Capital Adequacy ReportDownload:Download RMS Exposure Brief Report • Download RMS System Price Report
Exposure Brief Report Following information's will be available to DMCM’s in Exposure Brief Report on trade to trade basis: • Exchange ID • Symbol • Exposure Date • Client • Buy/Sell Quantity • Buy/Sell Amount • Excess/Below Par Value • Loss/Profit • Exposure • Exposure Demand
Exposure Summary Report Following information's will be available to DMCM’s in Exposure Summary Report: • Exchange ID • Symbol • Exposure Date • Market Type • Exposure • Exposure Demand • Loss Demand • Total Demand
Demand Payment Report Following information's will be available to DMCM’s in Exposure Demand Summary Report: • Net Outstanding Purchase/Sale Value • Total Exposure • Exposure Demand • Mark to Market Losses Demand • Total Demand • Already Deposited Collateral • Net Payable
Participant Collateral Position Report Following information's will be available to DMCM’s in Participant Collateral Position Report: • CM ID • Name • Bank • Collateral Type • Amount
System Price Report Following information's will be available to DMCM’s in System Price Report: • Symbol • Name • Face Value • Previous Day Closing Price • Last Traded Price • Calculated Price • High/Low/Average/System Price
Capital Adequacy Report Following information's will be available to BCM’s admitted as DMCM’s in Capital Adequacy Report: • CM ID/Name • Trader ID/Location • Exposure • Net Capital Balance • Position Limit • Balance
