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August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011
Plan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP Services
for OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivatives
Contents
ⅠⅠⅠⅠ. Global Overview
ⅡⅡⅡⅡ. Progress in Korea
ⅢⅢⅢⅢ. The Benefits and Process of Clearing by CCP
ⅣⅣⅣⅣ. Overview of Proposed CCP Services
ⅤⅤⅤⅤ. Activity Schedule
Ⅰ. Global Overview
GG--20 Pittsburg Agreement20 Pittsburg Agreement (`Sep, 2009)(`Sep, 2009)
All standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exchanges changes changes changes
or electronic trading platforms, where appropriateor electronic trading platforms, where appropriateor electronic trading platforms, where appropriateor electronic trading platforms, where appropriate, and , and , and , and cleared through cleared through cleared through cleared through
central countercentral countercentral countercentral counter----parties by endparties by endparties by endparties by end----2012 at the latest.2012 at the latest.2012 at the latest.2012 at the latest. OTC derivative OTC derivative OTC derivative OTC derivative
contracts should be reported to trade repositories.contracts should be reported to trade repositories.contracts should be reported to trade repositories.contracts should be reported to trade repositories. NonNonNonNon----centrally cleared centrally cleared centrally cleared centrally cleared
contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.
• USUSUSUS : Enactment of Dodd-Frank Act (July, 2010)
• JapanJapanJapanJapan : Amendment of Financial Instruments and Exchange Act (May, 2010)
• EuropeEuropeEuropeEurope : Preparation of European Market Infrastructure Regulation
1
JSCCJSCCJSCCJSCC (Japan)(Japan)(Japan)(Japan)
• CDS (July, 2011)
SGXSGXSGXSGX (Singapore)(Singapore)(Singapore)(Singapore)
• Commodities Deriv. (2006)
• FFA (2006)
• IRS (2010)
CME (US)CME (US)CME (US)CME (US)
• Commodities Deriv. (2002)
• CDS (2009)
• IRS (2010)
ICE ClearICE ClearICE ClearICE Clear (US)(US)(US)(US)
• Energy Deriv. (2007)
• CDS (2009)
LCH.ClearnetLCH.ClearnetLCH.ClearnetLCH.Clearnet (UK)(UK)(UK)(UK)
• IRS (1999)
• CDS (2010)
Eurex ClearingEurex ClearingEurex ClearingEurex Clearing (Germany)(Germany)(Germany)(Germany)
• CDS (2010)
IDCGIDCGIDCGIDCG (US)(US)(US)(US)
• IRS (2010)
Global CasesGlobal CasesGlobal CasesGlobal Cases
• Expanding services along with legislation
2
G20 Summit Agreement (Sep, 2009)
Ⅱ. Progress in Korea
Initiatives taken to introduce CCP service for OTC derivatives* To start voluntary clearing service of CCP
Operation of working group and commissioned the researches
• To introduce CCP services for standardized OTC derivatives by end-2012
* Higher capital requirements on non-centrally cleared contracts
Establishment of task force lead by FSC (Feb. ~ Jun.)
Public hearing on introduction of OTC market infra. (19, Nov.)
2007
2009
2010
Public hearing on upgrading of capital market infra. (4, Jul.)
2011The FSC had drafted a revision bill of the FSCMA, made public on July 27
※ FSC announced its plan to designate KRX as the CCP for OTC derivatives (26, Jul.) 3* FSCMA (the Financial Investment Services and Capital Markets Act)
Ⅲ. The Benefits and Process of Clearing by CCP
The Benefits of Clearing ServicesThe Benefits of Clearing ServicesThe Benefits of Clearing ServicesThe Benefits of Clearing Services
• Reducing settlement risk : Taking over counterparty risk and multilateral netting
* CCP takes over counterparty risk through novation
• Increasing Liquidities : Increasing trade volume due to mitigating counterparty risk
• Capital Incentives : Low credit exposure in Basel
• Reducing Operational Risk : Reducing the administrative burden as a result of
multilateral netting and streamlining settlement through CCP
Bilateral trading & clearing : $1,000bn Multilateral clearing by CCP : $200bn
AAAAAAAA
BBBBBBBB CCCCCCCC200mil.
300mil.200mil.
AAAAAAAA
BBBBBBBB CCCCCCCC
100mil.0 CCPCCPCCPCCPCCPCCPCCPCCPCCPCCPCCPCCP
DDDDDDDD300mil.100mil. 0 DDDDDDDD
4
Trade Execution
• Executed, either directly or via
an IDB
(Trade Confirmation)• Confirm the trade execution
through respective trade
registration platform
(KRX or other platforms)
Dealer BDealer A
IDB
Clearing Confirmation▽“Novation”▽
Netting▽
Settlement
Clearing participant A(Dealer A)
Clearing participant B(Dealer B)
1 11
2
2
2
3 4
4 4
Trade Confirmation
TradeTradeTradeTradeExecutionExecutionExecutionExecution
ClearingClearingClearingClearing
Clearing by CCP• Checking clearing eligibility
(Clearing confirmation)* Validation of trade for which the settlement
liability would be assumed by CCP• Novation, netting, settlement
and notice, etc* Reporting the clearing status to Clearing participants
Clearing ProcessClearing ProcessClearing ProcessClearing Process
TradeConfir-mation
5
* IDB : Inter-dealer Broker
Product to be covered by CCP services :Product to be covered by CCP services :Product to be covered by CCP services :Product to be covered by CCP services : Plain Vanilla Interest Rate Swap (KRW)
• IRSIRSIRSIRS(2012) ▶ CDSCDSCDSCDS ▶ FX FX FX FX (F/X Swap, CRS)
OTC Derivatives by Underlying Asset
Ⅳ. Overview of Proposed CCP Services
Extend service product in the long term
2,156(31%)
128(2%)
4,648(67%)
InterestRate
ForeignExchangeOthers Options(6%)
Forwards(1%)
Swaps(93%)
Contract Specifications
6
* notional amount outstanding, in KRW trillionas of Dec 2010
Structures• Plain Vanilla Swap* fixed-for-floating interest rate swap
Currency • Korean Won (KRW)
Index• 91 Days Certificate of Deposit Rate * Korea Financial Investment Association announcement
ContractAmount
• Up to 1 trillion KRW
Others
• Business Day Convention : “ Modified
Following” etc
• Day Count Fraction : “ Actual/365, etc
* Adjusted or Unadjusted by business day convention
A financial institution, that is not a clearing participant, is required to
entrust the clearing to a clearing participant
Indirectparticipant
ProprietaryProprietaryclearingclearing
ClearingClearingClearingClearingparticipantparticipantparticipantparticipant
CustomerCustomerclearingclearing
KRX(CCP)(CCP)(CCP)(CCP)
ProprietaryProprietaryclearingclearing
ClearingClearingClearingClearingparticipantparticipantparticipantparticipant
CustomerCustomerclearingclearing
Indirectparticipant
Entry into SettlementEntrustment Agreement
Entry into SettlementEntry into SettlementEntrustment AgreementEntrustment Agreement
7
Clearing Participants :Clearing Participants :Clearing Participants :Clearing Participants : Banks and Securities Firms
9
for OTC derivatives trade are able to directly participate in the service by becoming the KRX OTC clearing member
with the license
SafeguardsSafeguardsSafeguardsSafeguards
• Risk Management SystemRisk Management SystemRisk Management SystemRisk Management System : Issues related to OTC derivatives are incorporated
in the existing risk management system
• MarkMarkMarkMark----totototo----MarketMarketMarketMarket : : : : Marked-to-market for CCP trades using the clearing house’s
zero coupon yield curves
Margin Margin Margin Margin : To cover of price fluctuation
Clearing FundClearing FundClearing FundClearing Fund : To accumulate the fund for OTC derivatives
* Separate from other assets (securities/ derivatives)* Government bond can be used for accumulation
Settlement Reserve FundSettlement Reserve FundSettlement Reserve FundSettlement Reserve Fund : To use KRX’s own funds for default
(Used for all KRX markets)
Normal market
Extreme but
plausible
market
• Financial SafeguardFinancial SafeguardFinancial SafeguardFinancial Safeguard
8
* Cash and non-cash collateral (securities, etc.)
System Development PlanSystem Development PlanSystem Development PlanSystem Development Plan
(KRX or other systems)
청산결제시스템거래등록시스템
SecuritiesSecuritiesSecuritiesSecurities
DerivativesDerivativesDerivativesDerivatives
Clearing & Settlement System
Clearing Participant’sOwn System
Clearing & SettlementTerminal provided by KRX
(Dedicated Line)
<Notification of Clearing Status>
Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal
Provided by othersProvided by othersProvided by othersProvided by others
Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal
provided by KRXprovided by KRXprovided by KRXprovided by KRX
Clearing Confirmation
Netting
Novation
CheckingClearingEligibility
Trade Registration
(Public Line (Web))
KRXKRXKRXKRX Clearing ParticipantsClearing ParticipantsClearing ParticipantsClearing Participants
• To develop OTC derivatives clearing system and load it on theexisting clearing system of KRX
2
1
3
4
5
9
OTC OTC OTC OTC DerivativesDerivativesDerivativesDerivatives
Sending the matched trade
Reporting SystemReporting SystemReporting SystemReporting System
• To develop trade data management and reporting system for OTC derivatives
▶ Performing a role of Trade Repository of trades to be cleared
by CCP mandatory clearing transactions
Reporting System after Introduction of CCP Services
Financial Services Commission (FSC)Financial Services Commission (FSC)
CCPCCP
Trades to be clearedTrades to be cleared
Clearing
Reporting of trading details
10
Ⅴ. Activity Schedule
Target launch time :Target launch time :Target launch time :Target launch time : In the second half of 2012 In the second half of 2012 In the second half of 2012 In the second half of 2012 (July)(July)(July)(July)
Phase 2Phase 2Phase 2Phase 2Phase 1Phase 1Phase 1Phase 1 Phase 3Phase 3Phase 3Phase 3
Aug. Oct. Dec.Jan. Mar. April. Jun. Jul.
LacunchingLacunchingLacunchingLacunchingLacunchingLacunchingLacunchingLacunching
OfOfOfOfOfOfOfOf
ServiceServiceServiceServiceServiceServiceServiceService
To hold regular consultation meetings/ briefing sessions with relevant organizations
To draft rules & regulations
Trial operations
Public relations
Participation in consultation meetings
To updateparticipants’ systems
Interface test
Preparation for launch
To make Rules & Regulations by FSC’s review and approval
Systemdevelopment
System design
Preparation of system development plan
KRX
Participants(Banks/
Securities)
Revision
of the laws
Revision of the FSCMA
Revision of decree/regulation
11
Expansion of products
covered by CCP service
• IRS ▶ CDS ▶ FX
Mandatory trading requirements
Broadening of participant’s types
• Banks/Securities ▶ Trust/Insurance
Issues to be addressedIssues to be addressedIssues to be addressedIssues to be addressed
Establishment of clearing
link with foreign CCPs
12• Provision of CCP services for OTC
derivatives traded between Korean and overseas financial institutions
• Considering to mandate all standardized contracts to be traded on organized trading facilities
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