DEVELOPMENT OF REPO WITH THE CCP
Objectives To create a mechanism to enable secured money trading
To provide trading without establishing bilateral credit limits by members
Major benefits Market participants do not need to establish bilateral credit lines, one limit is imposed on the CCP Anonymous trades are available Standard discounts are employed Quick and comfortable execution of trades Online market repo rates for cash and securities backed up by orders and trades Minimization of cash and securities assigned for settlement as a result of obligations/claims netting across all repo trades with CCP Relief of the market participant’s capital (balance sheet netting of all trades) The unified and reliable risk management system (membership criteria, margin requirements, sufficient guarantee funds and CCP’s capital allow establishing a high credit limit for transactions with the CCP) Boosting the repo market’s liquidity The single counterparty for all market participants (the CCP ensures settlement of a repo trade to the non-defaulting party)
Major trading parameters
The counterparty to any trade is the CCP (CJSC JSCB National Clearing Centre) Order book and off-order book (direct trades) trading modes Admitted securities: sovereign bonds (OFZs) July 2013 – 50 top liquid shares (only direct trades) Autumn 2013 –Bonds from the Bank of Russia’s lombard list rated not below BBB- (only direct trades); shares (order book trades) Repo term: one day Settlement code: Y0/Y1 (for all modes, settlement at 17:00) Т0/Y1 (only direct trades, prompt delivery under the first part of the repo trade) Y1/Y2 (only direct trades, trading hours MSK, next day delivery at 17:00) Trading hours: 10:00-16:00 MSK Termination of obligations: 17:00 Settlement: 19:00
Risk parameters The Exchange sets the following parameters for each securities issue each trading day: Settlement price Market risk rate Calculated repo rate Interest risk rate Settlement price: Settlement price for shares is calculated based on closing prices in the modes T0 and T+ Settlement price for bonds is calculated based on trading results for all bonds of a particular issuer using the model static Z-spread Market risk rate: It is determined based on the underlying security’s historical volatility Calculated repo rate: It is determined based on the market rates of inter-dealer repo trades and repo trades with the CCP executed on the previous trading day Interest risk rate: It is calculated per a security based on a repo rate historical volatility and restricted by a lowest interest risk.
Risk parameters Interest risk:
Risk associated with a possible change in the repo rate Three levels of the interest risk rate are calculated for different position sizes The market risk is determined by a net short or long position: Market risk rate 1* – up to RUB1 bn (the position can be liquidated within a short period having no material effect on the security market price); Market risk rate 2* – RUB1 bn - RUB5 bn (the position can be closed within few days); Market risk rate 3* – over RUB5 bn (closing out the position can have a significant effect on the security market price). * Parameters for OFZs
Bonds: instruments traded and market risk rates
35 OFZ issues (Russian Federation Government bonds) OFZ Breakdown by duration 0-1 1-3 3-5 5-10 10-15 1st tier 3% 4% 6% 8% 10% 2nd tier 5.5% 9% 12% 15% 3rd tier 6.5% 8.5% 13% 17.5% 22%
Book repo trades with CCP
Trading mode: “Overnight repo with the CCP” Non-addressed orders Order book Order direction: “Buy/Sell”, “Sell/Buy” Limit and market orders Repo rate is traded Regular matching All book orders may be filled partially with the redundant repo amount and unsold securities residing on the order book 8
Off book repo trades with CCP
Trading mode: “Off order book repo trades with CCP” Off order book (addressed) trades Regular mechanism for filling orders Settlement codes : Y0/Y1 – delivery at 17:00 MSK, Т0/Y1 – a prompt delivery of the asset under the 1st part of the repo trade is available (only for off book trades) Y1/Y2 (available only for off book trades, delivery is at 17:00 on the next day)
Process for Executing Trades via the CCP
(2) Verification of parameters and collateral sufficiency (5) Information on the trade parameters (6) Confirmation of the trade parameters (3) Registration of the orders (4) Matching and trade parameters determination (7) Registration of the trade Participant 1 Participant 2 (1) Order entry (1) Order entry
Clearing & settlement Marking to market
The first and second parts of a repo trade with the CCP are settled at 17:00 MSK. Clearing members have to deposit assets to the Delivery Accounts/Subaccounts by 17:00 MSK. Where there is an insufficiency of assets on the Accounts/Subaccounts, the required assets shall be transferred from the Trading accounts/Subaccounts (provided that the Trading Member has not submitted an application prohibiting withdrawal of assets from the Trading accounts). Assets due by the end of settlement process are transferred to the Delivery Accounts/Subaccounts. After settlement cash/securities are transferred to the Trading accounts/Subaccounts automatically (provided that the member has not filed a prohibiting application). Marking to market Online adjustment of the Single limit. If the Single limit is negative, the member is prohibited to enter orders entailing the lower Single limit. Daily checking to ensure collateral sufficiency and issuing Margin calls should the collateral is insufficient. Clearing members must execute Margin calls by 17:00 MSK. If a member has failed to execute the Margin call, mandatory closing out is applied.
Principles of admission to repo trades with CCP
Market: Sector T+2 Repo with CCP Clearing Member’s contribution to the Guarantee fund Execution of trades: For the account of the trading member For the account and on the instruction of clients From February 05, 2013 RUB2 mn From July 08, 2013 RUB5 mn RUB10 mn From September 02, 2013 4-6% of the average risk associated with open interest*, but no less than RUB5 mn 44-6% of the average risk associated with open interest*, but no less than RUB10 mn Only Clearing members whose own capital is more than RUB180 mn are eligible for trading in the mode “Repo with CCP – book orders”**. * Calculation procedure will be given in the Clearing house’s Methodology for Guarantee fund contributions ** Launch date of this mode is under discussion
Default management If there are insufficient assets to fulfill obligations under the trade the mandatory closing out of positions in proportion to counterclaims is applied. Default waterfall Defaulter’s Risk Coverage Fund contribution (if available); Defaulter’s Guarantee Fund contribution; Defaulter’s personal clearing collateral registered by the Clearing Center; Non-defaulters’ Risk Coverage Fund contributions to the extent of the Fund-covered Limit set by the Clearing Center for the Defaulter; Non-defaulters’ Guarantee Fund contributions*; Non-defaulters’ Risk Coverage Fund contributions*. * Non-defaulters’ Guarantee Fund contributions exceeding the Fund-backed Limit set by the Clearing Center for the Defaulter is used if the Defaulters’ Debt to the Clearing Center surpasses 1 (one) billion Russian roubles.
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Contacts Repo and Deposit & Credit Operations Division
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