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Central Counterparty Institution in the currency Central Counterparty Institution in the currency exchange market exchange market : : current situationcurrent situation and development and development

prospectsprospects

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Central Counterparty institution andCentral Counterparty institution and its role in financial its role in financial marketsmarkets

• A Central Counterparty (CCP) acts as intermediary between transaction parties, i.e. as a seller for each buyer and a buyer for each seller, which upon that replace their contractual relations with each other with relevant contracts with CCPs.

• A CCP guarantees fulfillment of obligations to each bona fide participant in respect of his transactions regardless of fulfillment of obligations by other market participants.

• A CCP ensures legal transparency of contract making in the process of trading. Market participants always know who they close transactions with.

• A CCP saves the participants the trouble of assessing risks and set limits to each other. The participants

assess the risks of a Central Counterparty only.

• Transactions with CCPs enable participants to optimize cash flows between different markets thus increasing their efficiency.

• Usage of netting arrangements allows to reduce operational burden on a participant’s back-office.

• Introduction of a CCP institution to a market contributes to reducing of trading spreads, that increases market liquidity.

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Functions of Central Counterparty

• Risk management (organization and maintenance of efficient risk management system (RMS))

A CCP guarantees fulfillment of obligations to each bona fide participant in respect of his transactions regardless of fulfillment of obligations by other market participants.

• Improvement of market efficiency. A CCP contributes to increasing market liquidity, reduction of market participants’ costs while closing transactions, and also to development of instruments and services, allowing to increase the efficiency of usage of their resources by market participants.

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NCCNCC – – credit organizationcredit organization – – a Central Counterparty on the a Central Counterparty on the MICEXMICEX foreign-exchange marketforeign-exchange market

• Date of incorporation and start of operational activities: NCC was established in October, 2005, since December, 2007 it has been operating as a CCP on the MICEX foreign-exchange market

• Form of incorporation: closed joint-stock company• Core business: rendering of clearing services to financial market participants. • Structure of shareholders’ equity: CJSC Moscow Interbank Currency Exchange - 100 %• Charter capital:

Charter capital 4 435 mln. rubles (as of 01.11.10 ~ 104 mln. Euro)Amount of internal funds 7 986 mln. rubles (as of 01.11.10 ~ 187 mln. Euro)

• Average daily trading volume on the foreign-exchange market in 2010 ~ 9 bn. US Dollars• Increase of the share of the MICEX foreign-exchange market, serviced by NCC, in the overall

volume of foreign currency transactions on the Russian interbank market - from 16,2% (in 2008) to 27,6% (in II quarter of 2010)

• Licenses:for banking business of a professional participant of the securities market for clearing activities

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Indicators of financial soundness and business efficiency Indicators of financial soundness and business efficiency of NCCof NCC

• Ratio R1 (Capital adequacy ratio) – average for 2009 = 29,8%, actual value as of 01.01.2010 = 35,42%

regulatory value – not less than 10% (Regulation of CB RF No.110-I)

• Ratio R2 (Quick liquidity ratio) as of 01.01.2010 = 98,47% regulatory value – not less than 15% (Regulation of CB RF No.110-I) • Ratio R3 (Current liquidity ratio) as of 01.01.2010 =101,87% regulatory value – not less than 50% (Regulation of CB RF No.110-I) • Return on equity (ROE) = 24,5% (according to annual statements for

the year of 2009). value according to annual statements for the year of 2008 = 17,27%.• Return on assets (ROA) = 0,49% (according to annual statements for

the year of 2009). value according to annual statements for the year of 2008 = 0,19%.

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Changes in the equity capital of NCC

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1000000

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6000000

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9000000

1 qu

arte

r 07

2 qu

arte

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4 qu

arte

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2 qu

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3 qu

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4 qu

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arte

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Clearing organization scheme involving NCC participation in the Clearing organization scheme involving NCC participation in the MICEX foreign-exchange marketMICEX foreign-exchange market

Trading participant

Clearing participant

MICEXMICEX Trading functions: 1. Registration of orders 2. Orders matching 3. Trades registration 4. Execution and forwarding of extracts from the trades registrar

NCCNCCClearing functions:1. Control of STS standards2. Positions carrying 3. Limits calculation 4. Control of the orders funding5. Close of trading netting, calculation of net obligations and net

claims of the participants6. Calculation and holding of the participants’ escrow funds7. Execution and forwarding of stock-exchange certificates8. Controlling of obligations fulfillment on the PVP basis

NCC Risk Covering Fund

MICEX Funds Bank of Russia

Tradesaccept

Trades registrar

Control of the orders

funding

Orders forwarding

Information on the trades(extract from the trades registrar)

Advance deposit

Report on escrow fundsNotification on calculation of the NCC fee,

Stock-exchange certificate

Funds transfer

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Instruments in the transactions where NCC Instruments in the transactions where NCC acts as a CCPacts as a CCP

• USD/RUBUSD/RUB– USD/RUB_TOD: settlements on a trading day (deposit rate: 5%)– USD/RUB_TOM: settlements on a Tday+1 (deposit rate : 7,5%)– USD/RUB_TOD_TOM: SWAP (deposit rate : 12,5%)

• EUR/RUBEUR/RUB– EUR/RUB_TOD: settlements on a trading day (deposit rate : 5%)– EUR/RUB_TOM: settlements on a Tday+1 (deposit rate : 7,5%)– EUR/RUB_TOD_TOM: SWAP (deposit rate : 12,5%)

• EUR/USDEUR/USD– EUR/USD_TOD: settlements on a trading day (deposit rate : 7%)– EUR/USD_TOM: settlements on a Tday+1 (deposit rate : 10,5%)– EUR/USD_TOD_TOM: SWAP (deposit rate : 17,5%)

• KZT/RUBKZT/RUB– KZT/RUB_TOM: settlements on a trading day (deposit rate :100%)

• UAH/RUBUAH/RUB– UAH/RUB_TOM: settlements on a trading day (deposit rate :100%)

• BYR/RUBBYR/RUB– BYR/RUB_TOM: settlements on a trading day (deposit rate :100%)

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UTS and clearing schedule following UTS resultsUTS and clearing schedule following UTS results

NCC (performance)

Calculations Calc.Calc Calc

CalcCalc

Obligations calculation

EUR for RUB

15.00

00.00 10.00 12.30 17.00

00.00

24.00

10.00

-

17.00 20.0015.00

Clearing participants

Settlement bank

Obligations calculation

Closing of settlements of USD/RUB

Closing of settlements of EUR/RUB

18.0012.30

Depositing EUR, USDor RUB to the collateral

9.30

EUR for USD Traded instrument TOM

Traded instrumentsTOD and SWAP

14.00

Traded instruments TOD and SWAP

Traded instrumentTOM

Traded instrument TOM

USD for RUB

CP pays in EUR and USD, instrument EUR/USD

CP pays in EUR and RUB, instrument EUR/RUB

CP pays in USD and RUB, instrument USD/RUB

NCC pays in EUR, USD and RUB

Traded instruments TOD and SWAP

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Scheme of the accounts used for settlements following clearing results Scheme of the accounts used for settlements following clearing results

CJSCCJSC JSCBJSCB National Clearing National Clearing CentreCentre

MICEX Settlement MICEX Settlement HouseHouse

Clearing participantsClearing participants ((RCF participantsRCF participants))

BranchBranch No.No.55 of the of the Moscow MTA of Moscow MTA of the Bank of Russiathe Bank of Russia

Foreign correspondent banks 1

2

3

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1. Correspondent account NOSTRO in rubles in the MICEX SH (balance account No. 30402).2. Correspondent account NOSTRO in rubles in Branch No.5 of the Moscow MTA of the Bank of Russia (balance account No.30102). 3. Correspondent accounts LORO of the Clearing participants– RCF participants in rubles for keeping of the RCF assets (balance account No. 30109).4. Correspondent accounts in non-resident banks in foreign currency (balance account No.30114).

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NCC Treasury performance using online real-time express NCC Treasury performance using online real-time express

transfer system transfer system - - ORTETORTET..

Conducting of treasury operations using ORTET allows to:

- obtain real-time information on state of correspondent account, on the amount of the set limit of intraday credit and overnight credit, and as a consequence, plan cash flows more precisely;

- significantly mitigate liquidity risk and credit risk;- increase payments transfer speed;- real-time payments transfer facilitates more precise liquidity

planning and thus more efficient usage of free cash funds;- lengthen a trading day in the course of making transactions with

regional counterparties.

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Simplification of settlements with regions using ORTETSimplification of settlements with regions using ORTET

• ORTET provided NCC a possibility to make settlements with regional clearing participants without a settlement session joint with the Bank of Russia.

• Currently transfer of funds between regional settlement centers on total liabilities of clearing participants is made by NCC through ORTET upon such obligations/claims of the clearing participants are determined at the close of trading.

• Settlements with regional clearing participants can also be made by NCC using ORTET (if the clearing participant has an access hereto).

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Benefits of Central Counterparty in the marketBenefits of Central Counterparty in the market ((according to the according to the

data of the Bank of Finlanddata of the Bank of Finland)) • Trading benefits:

– Protection of (in case of a CCP functioning) absolute anonymity of transaction parties upon its conclusion;

– A CCP’s presence on the market leads to trade spreads narrowing. This allows market participants to offer to their clients narrower spreads on instruments thus increasing the market liquidity.

• Benefits related to risks mitigation: – Minimization of a counterparty credit risk. A CCP accepts risks of participants’ default;

– A participant needs to assess risks of one, but not all counterparties.

• Balance benefits : – Higher return on a participant’s capital in the market by means of lowering of costs in transactions with CCP;

– Capital release in using limited deposit model and calculations T+n allows to more efficiently meet regulatory bodies’ requirements in respect of equity capital adequacy.

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The main elements of the Risk Management system of the NCC as The main elements of the Risk Management system of the NCC as a Central Counterpartya Central Counterparty

NCC – is a reliable partner of the financial market participants, having efficient risk management instruments, including:• clearing participants rating system, being the basis for setting clearing participants’ net transaction limits.• Risk Covering Fund amounting to ~ 15 mln. US Dollars (as of 01.11.10);• settlements with clearing participants on the PVP principle;• control of transactions funding; • advance deposit arrangements;• setting of one-day exchange rate limits (as agreed upon with CB RF);• additional session with participation of the Bank of Russia in case of default by a defaulting participant.

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NCCNCC – – is a member of European Association of CCP Clearing is a member of European Association of CCP Clearing HousesHouses ( (EACH)EACH)

EACH was established in 1991 by major European Clearing houses for the purpose of setting professional contacts, related to clearing and risk management problematic.

• NCC membership in EACH made possible:

– For the NCC Risk Management System to be declared consistent with EACH standards and recommendations of the Committee on Payment and Settlement Systems of the Bank for International Settlements and International Organization of Securities Commissions;

– Participation of NCC in development of international standards and rules of CCP functioning, constant self-assessment of the bank and ensuring its consistency with the international standards under development helps to their implementation on the Russian financial market and to establishing of International financial centre in Russia.

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Prospects of development of NCC activities as a CCP on the Prospects of development of NCC activities as a CCP on the Russian financial marketRussian financial market

• In the mid-term NCC is planning to enter other markets of the MICEX group, such as:

– Forward market

– Securities market (including REPO market)

• In the bank’s long-term prospective there is also a possibility to spread a CCP functions to over-the counter markets .

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Improvement of NCC Risk Management system in Improvement of NCC Risk Management system in accordance with international standardsaccordance with international standards..

• A self-assessment conducted in terms of compliance with Recommendations of Committee on Payment and Settlement Systems of the Bank for International Settlements and Technical Committee of International Organization for Securities Commissions for Central Counterparties (CPSS/IOSCO Recommendations) demonstrated, that NCC activities as a Central Counterparty on the whole comply with accepted international standards.

• NCC implements in practice stress-testing on an ongoing basis for the purpose of assessment of influence on NCC activities of the following risks :

– credit risk;

– currency risk;

– liquidity risk;

– interest-rate risk;

– price (securities) risk;

– Central Counterparty risk, related to possible losses in case of default transactions compensation.

• Afterwards stress-testing system of NCC financial stability will include also operational risk assessment.

• NCC will constantly increase its equity capital so that it will meet the market growing demands. By 2011 the aggregate capital is planned to be increased to the level of more than 9 bn. rubles.

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System of stress-testing of NCC financial stabilitySystem of stress-testing of NCC financial stability

Stress-testing system allows to check NCC readiness to crisis, improve relevancy of made strategic and operating decisions in the field of risk management and the quality of equity capital planning

Procedure for periodical stress-testing and application of its results:

• Scenario analyses on the basis of repetition of historical events (crisis) and hypothetical events simulation;

• Quantitative risk assessment through critical market volatility analyses or analyses of marginal disadvantages;

• Assessment of equity capital adequacy (capital) and tier 1 capital for risks covering;• Recommendations to management bodies of NCC in respect of keeping capital

adequacy ratio through limits corrections of free cash distribution system, change in assets structure and parameters of RMS in exchange markets;

• Recommendations to management bodies of NCC in respect of planning of capital development, capital structure and profit disposition.

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Central Counterparty institution and establishment of Central Counterparty institution and establishment of International financial centreInternational financial centre..

Central Counterparty: – clear and transparent form of mutual relationship on the markets for foreign capital; – guarantor of stability of the financial market functioning; – uniform standards and rules of operating cooperation in different market;– legal transparency of operation in the market; – increasing of market efficiency, lowering of transactional costs of market players; – ensuring of conformity with the requirements of international organizations (such as

International Organization for Securities Commissions (IOSCO) and Committee on Payment and Settlement System of the Bank for International Settlements (CPSS)).

CJSCCJSC JSCBJSCB National Clearing CentreNational Clearing Centre

Thanks for your attentionThanks for your attention!!

Our address: Russia, 125009, Moscow,

13 Bolshoy Kislovsky Lane

Telephone: +7 (495) 782 97 94

E-mail: info@nkcbank.ru

http: //www.nkcbank.ru