Project launching OTC derivative and repo
clearing in KDPW_CCP using novation
Project Environment
Adverse impact of the financial crisis
• Adverse impact of the crisis on the stability of the financial sector
• Reduced liquidity on the OTC market
• Increased volaility of trade values
• Rising awareness of credit risk in the ‘world after Lehman’
New regulations
• UE: EMIR – Regulation on OTC derivatives, central counterparties and trade
repositories – pending approval of the European Parliament
• USA: Dodd-Frank Act - implemented 21/07/2010
• Basel III, CRD IV – in market consultation
2
Identifying the Legal Environment
EMIR - Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL on OTC derivative transactions, central counterparties and trade repositories.
• Central clearing of trades
mandatory clearing via a CCP (central counterparty) of all standard derivatives traded outside the
regulated market
• Reporting to trade repositories
mandatory reporting of all trades, both cleared centrally and bilaterally, to trade repositories
• Rules for CCPs and trade repositories
- authorisation and supervision of CCPs
- capital requirements
- organisational requirements
- precautionary requirements (risk guarantee system)
- interoperability
3
Identifying the Legal Environment
 Basel Committee on Banking Supervision
 Consultative Document Capitalisation Of Bank Exposures To Central Counterparties
•
•
Exposures to CCPs in respect of MtM and margins subject to low (2% risk weight) capital
requirements owing to multilateral netting of liabilities and loss protection mechanisms
offered by CCPs
Bank exposure to the default fund determined on the basis of the current financial
resources of the CCP in relation to hypothetical capital requirements. CCP hypothetical
capital determined under CEM (Current Exposure Method).
4
List of Active and Planned CCP
Services for OTC Derivatives
Country
Service
Scope
Status
Germany
Eurex Clearing
IRS
Planned
Japan
JSCC
IRS
Planned
Poland
KDPW_CCP
IRS, FRA
Planned
Sweden
Nasdaq OMX
IRS
Active
UK
CME Clearing E.
IRS
Planned
UK
LCH.Clearnet Ltd
IRS
Active
France
LCH.Clearnet SA
IRS
Active
USA
CME
IRS
Active
USA
IDCG
IRS
Active
USA
NYPC
IRS
Planned
Bank for International Settlement, CGFS Papers No
46
5
Why KDPW_CCP?
• Experience in clearing: new clearing guarantee model of the clearing house
KDPW_CCP spun off from KDPW in July 2011
• Technical and technological infrastructure and existing communication
infrastructure with participants
• KDPW_CCP’s neutral position as a counterparty to market participants
• Clearing Model accepted by the Banking Expert Team
• Relations with PFSA, NBP, market participants
• KDPW_CCP ability to use collateral in securities, which greatly reduces the
cost of collateral
• Own capital of KDPW_CCP
6
Consultations with the Banking Expert Team
The Banking Expert Team has approved:
•
•
•
•
•
•
Clearing model
Scope of cleared instruments
Instrument valuation model
Staged implementation of the project
Use of confirmation platforms
Risk management
All banks have been invited to participate in KDPW_CCP consultations;
64 representatives of 17 banks took part in the consultations.
7
Proposed OTC Clearing Model
Client
Trading
Member A
External trading platform
Trading
Member B
Client
Terminatio
n Platform
(TriOptima)
Clearing
Member A
Clearing
Member B
•Trade clearing
•Trade repository
•Clearing risk and position management
•Clearing guarantee system
•Processing settlement in third-party
systems
Thomson
Reuters
•market
data
transfer
KDPW_CCP
KDPW Member
A
Payer Bank A
KDPW (CSD)
•Cash settlement
•Collateral in securities
PFSA
MarkitWire
SWIFT Accord
•Trade validation
•Trade affirmation
•Trade matching
KDPW Member B
additionally in
payer bank function
NBP Settlement in PLN
8
KDPW_CCP Clearing Model: Key Functionalities
Third-party trading platform
MarkitWire
SWIFT Accord
KDPW_CCP
Accepting trades for clearing
Clearing
Formal and
substantive
check of
instructions
Reporting
Interpositioning
KDPW_CCP
as legal counterparty
Calculating
interest
payments
and MtM
Prowadzenie
Backloading
Contributions
to the clearing
guarantee
system(margin
s and fund)
Sending
instructions
for
settlement
rozliczeń
Early termination (Auction)
(Tri Optima – automatic
termination)
Risk management
•Defining and
calculating risk
parameters
•HVar
•Price monitoring
•Back testing
•Stress tessting
•Exposure limits
Collateral
administration
•Securities register
•Collateral valuation
Trade repository
9
Collateral Processing Model
Collateral processing
KDPW
Member
Credits and debits in
respect of
contributions to the
clearing guarantee
fund
CASH
SECURITIES
COLLATERAL
REGISTER
Collateral valuation
Determining the haircut
Transfer of ownership
in KDPW_CCP
account with KDPW
Accepting
collateral
securities:
a) Treasury bonds
b) W20 index shares
NBP
KDPW_CCP settlement in PLN
10
in
Instruments: List Approved with Banks
Phase 1 – 01 January 2013
• Forward Rate Agreements
• Interest Rate Swaps
• Overnight Index Swaps
• Basis Swaps
• Repos
Phase 2 – 01 January 2014
• Cross Currency Interest Rate Swaps
• Options
• Other
11
Proposed Introduction of Clearing Novation to
Regulations
 Clearing novation means that the clearing house takes over the rights and
obligations of a counterparty to a trade. Once a trade has been accepted for
clearing, the rights and obligations arising from the trade expire in the relations
between the trade counterparties and are replaced by new legal relations.
 Clearing novation will be used on the organised market and outside the organised
market.
12
Novation
Trade #1
Member A
Member B
BUY
SELL
KDPW_CCP
Trade #2

SELL
BUY
Trade #2
If a counterparty to a trade is a clearing member and has committed itself to the clearing house
to perform obligations arising from the clearing of its trades, it is entitled to receive or liable to
provide a benefit resulting from the clearing of the trade vis-a-vis KDPW_CCP.
13
Consequences of Clearing Novation to
KDPW_CCP
•
•
•
•
•
Rights and obligations arising from the trade expire while new legal relations arise, to
which the clearing house is a party.
The clearing house is entitled to claim the benefits arising from the trade with regard
to the trade counterparty (if it is a member) or a member which is a party to clearing.
Once a trade has been accepted for clearing, a member which is a party to clearing
and the clearing house may only raise claims arising from the legal relations which
have replaced the original trade.
A member which is a party to clearing cannot raise claims against the clearing house
arising from the legal relation between the member and the entity which concluded
the trade.
Collateral established by the entity concluding the trade subject to clearing by the
CCP is excluded from the liquidation assets of the member.
14
Legislative Amendments

As a result of consultations initiated by KDPW with market institutions (PFSA, NBP, WSE, Chamber of
Brokers, Polish Banks Association, BondSpot, Custodian Banks Council), a draft has been submitted to
the Finance Ministry, requesting an amendment of the Act on Trading in Financial Instruments. Key
amendments include:
•
Art. 45b
Act on Trading in Financial Instruments:
- amendment of the definition of trade clearing: addition of the clearing house as entitled to receive
or liable to deliver cash and non-cash benefits arising from concluded trades;
Art. 45e
- amendment excluding collateral established by the entity concluding the trade outside of
organised trading subject to clearing by the clearing house from the liquidation assets of the member
Art. 45g-45i - amendment introducing clearing novation.
Art. 50, Art. 68b - amendment adding new functionalities in the clearing house and KDPW regulations
Art.68
- amendment concerning guarantee funds, including establishment of guarantee funds for trades
concluded outside the organised market
•
Harmonising amendments of the Act on Public Offering (Art. 67,90) and the Act on Civil Law Transaction Tax
(Art. 9).
15
KDPW_CCP Clearing Guarantee System
Participant requirements
Price monitoring
Margins
Back Testing
MTM
Monitoring
exposures /
concentration
Default fund
+ additional margins
Stress Testing
CCP capital
16
State-of-the-art Risk Management System
•
Valuation – instrument valuation model customised to market specificity
•
Calculating risk based on HVaR (historical VaR)
•
5-day risk calculation horizon
•
Confidence level – 99.9%
•
500 days – look back period
•
Default fund – covers stress-test risk
•
Additional margins – cover individual participant exposure between default fund
updates
•
Stress-tests – test the adequacy of resources pooled in the clearing guarantee
system
•
Back-tests – test the adequacy of the risk estimation model and its parameters
17
Guarantee System Resources
I.
Individual margins
II. Default fund
III. Additional margins
IV. KDPW_CCP capital
18
Staged Project Implementation
1.
2.
3.
4.
5.
6.
7.
Establish co-operation with Banking Expert Team
Jointly develop OTC trade clearing model
Approve standards of OTC instruments covered by phase 1
Develop risk management methodology and valuation rules
Develop functional and technical specification of the new IT solution
Select IT solution vendor
Initiate Design Study with selected vendor
8. Implementation work
9. Present technical documentation and draft regulations to participants
10. Expected introduction of novation to Polish regulations
Jun 2012
11. Amendment of KDPW_CCP regulations
12. Signing agreements with participants
13. Testing the system with participants
14. Increase of KDPW_CCP capital
15. Production rollout
2013
D
O
N
E
P
L
A
N
N
E
D
Jan-Jun 2012
Mar 2012
AprJan-Jun 2012
Dec 2012
Aug-Nov 2012
Q2-3 2012
Jan
19