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Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF) July 4, 2009 Korea Securities Depository.

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Presentation on theme: "Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF) July 4, 2009 Korea Securities Depository."— Presentation transcript:

1 Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF)
July 4, 2009 Korea Securities Depository

2 Contents KSD Collateral Management KSD Collateral Management Services
Pledging Service KRX Futures Substitute Securities Management Collateral Management for OTC Derivatives Transactions Secured Call Collateral Management Services Repo Collateral Service Securities Lending & Borrowing Collateral Service

3 KSD Collateral Management Services
Transactions related KSD’s collateral management services are related to the following transactions. Participant’s request to set pledge KRX(Korea Exchange) Derivatives Trades OTC Derivatives Trades Secured Call Transactions Repo Trades Securities Lending & Borrowing

4 Participant’s Request to Set Pledge
Participant’s request for Pledge On a participant’s request, KSD set pledge on deposited securities on a book-entry basis. Trades related to participants’ pledge request Participants usually request pledge to secure loan between the participants, however, KSD does not examine the underlying transactions for pledge between the participants Pledgee can withdraw or transfer the pledged securities, but pledger needs pldegee’s consent to cancel the pledge and withdraw or transfer the securities. Income Entitlements Dividends, bonus shares, interest, and other income entitlements from pledged securities are delivered according to the prior agreement between the pledgor and pledgee.

5 KRX Futures Substitute Securities Management
KSD services for Exchange traded Futures Investors of futures or options listed in the KRX(Korea Exchange) deposit margin with cash or substitute securities instead of cash. KSD receives and safekeeps the substitute securities. KSD provides right exercise services for the investors. KRX performs mark-to-market for the substitute securities. KSD provides deposit and withdrawal services in accordance with the information on necessary amount of margin. KSD began the service in March 1999. Eligible substitute securities: listed stock, listed bond, etc,. Related parties: Investors(clients of futures company), futures companies, KRX

6 KRX Futures Substitute Securities Management
KSD Service Procedures Account Opening: Opening of Participant Account for futures companies and client accounts for its clients Deposit of substitute securities: KSD notifies KRX of securities information, amount, and substitute amount of substitute securities after the deposit is completed. Withdrawal of substitute securities: In case where the total amount deposited by the participant exceeds the required amount, the participant can request withdrawal. KSD notifies KRX and the participant of the information on the withdrawal Entitlement Processing: KSD processes the exercise of rights arising from substitute securities for futures companies.

7 Collateral Management for OTC Derivatives Transaction
KSD Services Collaterals for OTC derivatives transactions are deposited with the KSD for their management Service started in September 2002 Eligible collateral Stocks listed on KRX Bonds evaluated by credit rating agencies designated by the Governor of the Financial Supervisory Service(FSS) Cash: Korean Won, US dollar Participants: securities firm, bank, foreign financial institution, etc. KSD’s collateral management Custody of collateral Processing entitlements to collateral Establishing or canceling pledges Valuation of collateral and mark-to-market Processing collateral substitution or exchange

8 Assigning Identification Code Registering Details of Pledge
Collateral Management for OTC Derivatives Transaction Registration of Pledge and Starting Collateral Management Pledgor Pledgee OTC Derivatives Transaction KSD Request Of Pledge Details Of Pledge Matching Assigning Identification Code Registering Details of Pledge Traders of OTC Derivatives enter details of pledge(counterparty, trade value, pledged securities/cash, etc.) into KSD collateral management system KSD system verifies that both requests are matched If those are matched KSD system assigns ID code to the transaction, registers it into KSD system, and begins collateral management.

9 Collateral Management for OTC Derivatives Transaction
Mark-to-market and administration of collateral Cash collateral Information Stock market (Closing price of Previous day) Bond Rating Companies (Valuation of bonds) Mark-to-market System Pledgor Pledgee Details of collateral revaluation and margin call if necessary KSD receives closing price of stock from KRX and values of bonds from bond rating companies on a daily basis. After marking-to-market KSD compares values of collateral and necessary amount of collateral to find if excess or lack of collateral. KSD notifies both the pledgor and pledgee of collateral revaluation results and make margin call if necessary.

10 Collateral Management for OTC Derivatives Transaction
Closing of collateral management/Transferring collateral Expiration of Collateral Management Period Automatic Closing C L O S I N G Transferring collateral To Pledgor Failure in Margin Call Failure to fulfill requirement Pledgor’s Request request consent YES In case of failure Transferring collateral To Pledgee Pledgee’s Request Request of closing If the pledgor fails to satisfy margin call from KSD or to fulfill requirements of collateral substitution from the pledgee, KSD closes the management of collateral. Closing on pledgor’s request needs consent of pledgee. When the collateral management is closed due to pledgor’s failure to fulfill requirements for collateral management, KSD transfers the collateral to the pledgee.

11 Secured Call Transaction Collateral Management
Secured Call Transactions Secured call transactions are short term money lending and borrowing transactions of financial institutions collateralized by securities. KSD provides collateral management for the transactions KSD’s service started in October 2003. Players in secured call market Inter-dealer broker: brokerage for secured call transactions Financial institutions: bank, securities firm, insurance, investment, fund Settlement bank: transferring money KSD: matching, settlement, collateral management

12 Secured Call Transaction Collateral Management
KSD’s settlement of secured call transaction Principles DVP: Call money is transferred against establishment or cancellation of pledge(Delivery versus Payment). In case of agreement of both parties, FOP(Free of Payment) is possible. Settlement of funds should be made through KSD account with the settlement bank. (Exception: FOP) Initial settlement: On the trade date KSD receives trade details from Inter-dealer broker and send the details to each party for confirmation. After the confirmation, KSD transfers the money and establish pledge on a DVP basis. Repayment settlement: On the repayment date KSD transfers money to lender and cancel the pledge on a DVP basis. Extension of lending period is possible before the repayment date. In this case KSD receives the extension details from the Inter-dealer broker and after each party’s confirmation KSD settles the difference between the trades.

13 Secured Call Transaction Collateral Management
KSD’s collateral management for secured call transaction Principles Each transaction is secured by its own collateral. Lender has no right to decide if he accepts the collateral offered by the borrower once the collateral falls in the category of collateral designated by KSD. However, Lender and borrower can agree on collateral pool by securities category before the borrower make pledge. Eligible collateral: listed stocks, listed bonds, CPs, etc. *Securities issued by the borrower or difficult to evaluate are not eligible. Mark-to-market: KSD marks the collateral to market daily by its transaction and takes appropriate steps to have necessary amount of collateral maintained. The borrower who received margin call should offer additional collateral by 2:30 pm. Only the amount exceeding the necessary amount of collateral can be withdrawn. Values of collateral=price of collateral×valuation ratio×amount

14 Secured Call Transaction Collateral Management
KSD’s collateral management for secured call transaction Collateral Pool Collateral pool is designated by securities category(ex, stock, government bond, financial bond, etc.) If collateral pool is not designated by the transaction parties, borrower can offer any securities among eligible collateral designated by KSD. Collateral substitution: Borrowers can substitute its collateral for another collateral in collateral pool. Substitution for collateral outside of the collateral pool must be approved by the lender. Lender can request replacement of collateral for some reasons such as bankruptcy of the collateral issuer. Entitlement processing: Entitlements from the collateral belong to the one designated by the parties.

15 Repo Collateral Management
Through the tri-party repo settlement system, KSD provides deposit of traded securities, settlement of trades, and collateral management. Trade Details Notification settlement for initiation and closing of trade maintenance of exclusive account for Repo risk management through mark-to-market Entitlement processing for Repo securities Trade Repo Seller Repo Buyer Inter-dealer Broker KSD

16 Repo Collateral Management
KSD Services KSD Tri-party Repo service started in November 1999. Players Buyer, Seller: securities firm, bank, insurance company, etc. Broker: Inter-dealer Broker, securities firms Settlement Agent: banks Repo eligible securities: securities that can be marked to market among the followings government bond, municipal bond, corporate bond CP MBS CB, BW are excluded

17 Repo Collateral Management
KSD’s settlement of Repo transaction Comparison of Repo Transaction Repo trade parties or Inter-dealer broker enter trade details into KSD repo system. KSD compares the details from each participant and if they are matched it proceed to settlement by preparing settlement details. Settlement KSD checks the seller’s account for confirmation of necessary amount of securities and if it has enough amount, KSD settles the trade by transferring securities and money. Settlement is made on a DVP basis. FOP is also possible depending on the participants. The computer link between KSD and the central bank provide DVP settlement of securities and money. In case of FOP, settlement risk is minimized by holding the securities until the money transfer is confirmed.

18 Repo Collateral Management
KSD’s collateral management for Repo transaction Mark to market KSD performs daily evaluation of traded securities and compares the values with necessary amount of collateral and calculate the gap in risk. If necessary KSD notifies related party of the necessary amount of additional margin. Traded securities can be re-traded for repo or sold by the buyer, however margin is not allowed for disposal for KSD to keep it as collateral. Any income from the traded securities is paid to the seller. Collateral pool is designated by the parties in advance. Cash or bond is eligible for collateral. Interests are paid to the cash collateral pledgor and income from bond collateral is paid to bond collateral pledgor.

19 Collateral Management for Securities Lending & Borrowing
KSD functions as intermediary and collateral manager for SLB transactions Borrow Request Lend request Borrower KSD Lender collateral Trade details Trade details Borrower Account Lender Account Credit Debit 1) Request: If the request details are matched, SLB contract is made. 2) Collateral: Borrower offers collateral as cash or securities more than required amount. 3) Trade detail notification: When the requests are matched KSD notifies the parties of trade details. 4) Transferring SLB securities: Once the borrower offers enough collateral KSD transfers loan securities to the borrower account.

20 Collateral Management for Securities Lending & Borrowing
SLB transaction through KSD When the securities transferred to the borrower account, the ownership of the securities is transferred together. Six month expiration, but the lender can always recall and the borrower can always pay back before the due date. Rollover is also possible. KSD guarantees return of securities on loan when the borrower fails to fulfill its obligation. Service started in August 1996. Participants Lender: pension, fund, bank, investment company, insurance company Borrower: securities firms are main borrowers Intermediary: KSD Eligible securities Listed stock, listed bond, Exchange Traded Fund

21 Collateral Management for Securities Lending & Borrowing
SLB collateral management by KSD Eligible collateral and valuation KOSPI200 Stock: 80% of previous day closing price(other listed stock: 70%) Government bond, municipal bond: 100% of price Financial bond/corporate bond above BB rating: 80%~95% of price according to its rating Exchange Traded Fund: 80% of the previous day closing price Cash: 100% Mark-to-market KSD marks collateral to market and check if the borrower fulfills its necessary margin. The collateral value shall be over 130% of the value of the loan stock and 105% of the value of the loan bond respectively.

22 Collateral Management for Securities Lending & Borrowing
SLB collateral management by KSD Income from collateral Cash collateral is managed by KSD and Incomes from cash collateral are paid to the provider of the cash on a monthly basis. Income from securities collateral is added to collateral pool of the borrower. Entitlement processing for securities on loan Principle: The borrower shall deliver to the lender the same amount of income entitlements that the lender would have been entitled to (Exception: voting right). Rights offering: KSD pays subscription money received from the lender, if the lender applies for subscription by the first day of subscription. After listing of the stocks, KSD receives the stocks purchased by the borrower and deliver them to the lender. Stock dividend: KSD collects incomes from the borrower within 3 business days from the date of listing and delivers to the lender stock dividends or bonus stocks.

23 Thank You! Hyun Chul Cho Derivatives Services Team, KSD

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