3 KSD Collateral Management Services Transactions relatedKSD’s collateral management services are related to the following transactions.Participant’s request to set pledgeKRX(Korea Exchange) Derivatives TradesOTC Derivatives TradesSecured Call TransactionsRepo TradesSecurities Lending & Borrowing
4 Participant’s Request to Set Pledge Participant’s request for PledgeOn a participant’s request, KSD set pledge on deposited securities on a book-entry basis.Trades related to participants’ pledge requestParticipants usually request pledge to secure loan between the participants, however, KSD does not examine the underlying transactions for pledge between the participantsPledgee can withdraw or transfer the pledged securities, but pledger needs pldegee’s consent to cancel the pledge and withdraw or transfer the securities.Income EntitlementsDividends, 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 FuturesInvestors 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 ProceduresAccount Opening: Opening of Participant Account for futures companies and client accounts for its clientsDeposit 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 withdrawalEntitlement Processing: KSD processes the exercise of rights arising from substitute securities for futures companies.
7 Collateral Management for OTC Derivatives Transaction KSD ServicesCollaterals for OTC derivatives transactions are deposited with the KSD for their managementService started in September 2002Eligible collateralStocks listed on KRXBonds evaluated by credit rating agencies designated by the Governor of the Financial Supervisory Service(FSS)Cash: Korean Won, US dollarParticipants: securities firm, bank, foreign financial institution, etc.KSD’s collateral managementCustody of collateralProcessing entitlements to collateralEstablishing or canceling pledgesValuation of collateral and mark-to-marketProcessing collateral substitution or exchange
8 Assigning Identification Code Registering Details of Pledge Collateral Management for OTC Derivatives TransactionRegistration of Pledge and Starting Collateral ManagementPledgorPledgeeOTC Derivatives TransactionKSDRequestOf PledgeDetailsOf PledgeMatchingAssigning Identification CodeRegistering Details of PledgeTraders of OTC Derivatives enter details of pledge(counterparty, trade value,pledged securities/cash, etc.) into KSD collateral management systemKSD system verifies that both requests are matchedIf those are matched KSD system assigns ID code to the transaction, registers itinto KSD system, and begins collateral management.
9 Collateral Management for OTC Derivatives Transaction Mark-to-market and administration of collateralCash collateralInformationStock market(Closing price ofPrevious day)Bond RatingCompanies(Valuation of bonds)Mark-to-market SystemPledgorPledgeeDetails of collateral revaluation and margin call if necessaryKSD receives closing price of stock from KRX and values of bonds from bondrating companies on a daily basis.After marking-to-market KSD compares values of collateral and necessaryamount of collateral to find if excess or lack of collateral.KSD notifies both the pledgor and pledgee of collateral revaluation results andmake margin call if necessary.
10 Collateral Management for OTC Derivatives Transaction Closing of collateral management/Transferring collateralExpiration of Collateral Management PeriodAutomatic ClosingCLOSINGTransferring collateralTo PledgorFailure in Margin CallFailure to fulfill requirementPledgor’s RequestrequestconsentYESIn case of failureTransferring collateralTo PledgeePledgee’s RequestRequest of closingIf the pledgor fails to satisfy margin call from KSD or to fulfill requirements ofcollateral 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 fulfillrequirements for collateral management, KSD transfers the collateral tothe pledgee.
11 Secured Call Transaction Collateral Management Secured Call TransactionsSecured call transactions are short term money lending and borrowing transactions of financial institutions collateralized by securities. KSD provides collateral management for the transactionsKSD’s service started in October 2003.Players in secured call marketInter-dealer broker: brokerage for secured call transactionsFinancial institutions: bank, securities firm, insurance,investment, fundSettlement bank: transferring moneyKSD: matching, settlement, collateral management
12 Secured Call Transaction Collateral Management KSD’s settlement of secured call transactionPrinciplesDVP: 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 transactionPrinciplesEach 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 transactionCollateral PoolCollateral 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 DetailsNotificationsettlement for initiation and closing of trademaintenance of exclusive account for Reporisk management through mark-to-marketEntitlement processing for Repo securitiesTradeRepo SellerRepo BuyerInter-dealerBrokerKSD
16 Repo Collateral Management KSD ServicesKSD Tri-party Repo service started in November 1999.PlayersBuyer, Seller: securities firm, bank, insurance company, etc.Broker: Inter-dealer Broker, securities firmsSettlement Agent: banksRepo eligible securities: securities that can be marked to market among the followingsgovernment bond, municipal bond, corporate bondCPMBSCB, BW are excluded
17 Repo Collateral Management KSD’s settlement of Repo transactionComparison of Repo TransactionRepo 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.SettlementKSD 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 transactionMark to marketKSD 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 transactionsBorrow RequestLend requestBorrowerKSDLendercollateralTrade detailsTrade detailsBorrowerAccountLenderAccountCreditDebit1) 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 KSDWhen 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.ParticipantsLender: pension, fund, bank, investment company, insurance companyBorrower: securities firms are main borrowersIntermediary: KSDEligible securitiesListed stock, listed bond, Exchange Traded Fund
21 Collateral Management for Securities Lending & Borrowing SLB collateral management by KSDEligible collateral and valuationKOSPI200 Stock: 80% of previous day closing price(other listed stock: 70%)Government bond, municipal bond: 100% of priceFinancial bond/corporate bond above BB rating: 80%~95% of price according to its ratingExchange Traded Fund: 80% of the previous day closing priceCash: 100%Mark-to-marketKSD 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 KSDIncome from collateralCash 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 loanPrinciple: 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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