KELER CCP capital
Back in May the AGM of KELER and KELER CCP approved a capital increase in KELER CCP of HUF 4bn effective 1 July 2013 following the capital shift between the two institutions in January 2013. At the beginning of the year KELER CCP took over all clearing functions from the CSD, KELER, which resulted in a capital shift of 508mn from KELER to KELER CCP. The planned capital increase will further strengthen the CCP company and will ensure full EMIR compliance in terms of capital requirements. Parallel to the change in the capital amount KELER’s unconditional guarantee towards KELER CCP will decrease from HUF 8bn to HUF 4bn with same effective date.
Furthermore EMIR sets three different capital elements that need to be in place and assigns well defined functions to each.
1. The minimum, permanent and available initial capital of EUR 7.5mn (approximately HUF 2.2bn) for a CCP cannot be used for guarantee purposes, shall at all times be sufficient to ensure an orderly winding-down or restructuring of the activities over an appropriate time span and an adequate protection of the CCP against credit, counterparty, market, operational, legal and business risks.
2. To cover potential losses beyond the amount covered by margin requirements and the guarantee funds, the CCP company shall maintain pre-funded financial resources i.e. dedicated capital in the amount of 25% of the minimum capital. In case of KELER CCP HUF 550mn will be dedicated for this purpose at the beginning and it will be distributed among the guarantee funds proportionally.
3. The rest of the CCP capital (in case of KELER CCP it amounts to HUF 2.3bn) will be identified as supplementary capital that will be used as a last resort to guarantee regulated market settlement in case of defaults.
The 3 elements together will add up to HUF 5.1bn on the balance sheet of KELER CCP.
CCP committees
In future KELER CCP will need to operate a Risk Committee, a Supervisory or Audit Committee and a Remuneration Committee. The Risk Committee will include independent board members, clearing members and their clients. On its quarterly meetings Risk Committee will approve risk management procedures, will submit proposals, discuss stress test results but will not actively participate in daily operations or the management of crisis situations.
KELER CCP Rules and CCP license
KELER CCP has drafted new rules that will fully comply with EMIR and will mandatorily apply for all clearing members in the regulated markets of the Budapest Stock Exchange (BSE), MTS Hungary as well as all the gas and power markets for which KELER CCP provides services. The rules and related fee schedule are being reviewed by the market supervision and expectedly will come into effect as of 1 July 2013. The changes in the rules will require all clearing members (including remote members currently active in Hungary) to sign new agreements with KELER CCP. As soon as the revised versions are available UniCredit GSS will contact clearing member clients to arrange for the timely renewal of the documents.
KELER CCP will submit its application for EMIR compliant CCP license by mid September 2013 and expect to get it within 6 months the latest. The license is necessary for all CCPs to continue providing services under EMIR.
Trade Repository and OTC derivative services
EMIR requires all types of derivate transactions irrespective of the trading method (regulated market or OTC) and product (commodities, credit, FX, equity, interest rate, other) to be reported to trade repositories and contains detailed rules for their operation. All the clearing members, their underlying clients (with the exception of private persons) and KELER CCP shall report each transaction to ESMA. KELER CCP has made a decision to apply for the trade repository license and offer services to clearing members and their clients. The scope of services will include collection and reporting of transaction details on a T+1 basis, preparation of weekly statistics, granting access for supervisions and clients to stored data and other ancillary services. KELER CCP is willing to take over the reporting responsibility from other parties based on a contract that is fully in line with EMIR’s rules and will charge membership, reporting and record keeping fees for the service. According to the plans KELER CCP will start the data transmission service in the fourth quarter of 2013 and start functioning as full trade repository effective 1 January 2014 depending on the time ESMA grants the necessary license.
KELER CCP is investigating the possibility to offer centralized OTC derivative clearing services for all products. There are ongoing discussions with the National Bank of Hungary already and the strategic decision can be expected by the end of the year.
Segregation
Once KELER CCP’s amended rules come into effect there will be a possibility for clearing members to segregate any or all of their clients and manage their positions separately. If it happens, all collaterals will have to be split accordingly, too. Each segregated client will need to apply for a dedicated identification number on the spot markets and it will be a must that the clearing member uses the proper code at the time of the trading otherwise the CCP company will not be in the position to properly segregate the positions during the clearing and settlement process.
The new segregation service will provide more safety for the clients of the clearing members as handles all positions and collaterals on dedicated accounts that cannot be used to fulfil other clients’ obligations. Furthermore, segregated clients will have the option to appoint a so called secondary or auxiliary clearing member. In case the primary clearing member, under whom the client is segregated, is in default, the client may activate the secondary clearing member within 3 settlement days and transfer all positions and collaterals between the accounts. Segregation will be completed by KELER CCP based on the joint request of the clearing member and its client provided all documentation is provided and the dedicated identification number for the client is in place. KELER CCP will charge HUF 50,000 per segregated client per month.
T+2
In line with EU level harmonization efforts based on CSDR regulation KELER CCP deems September - November 2014 to be the most probable period for shortening the equities settlement cycle from T+3 to T+2. Further consultation with market participants is expected on the subject.
Clearing deadline
KELER CCP changed the clearing deadline back in June 2012 from 11:00 a.m. to 2:00 p.m. as a result of a consultation process so clearing members have more time to provide the necessary positions for the clearing process. KELER CCP confirmed that since the shift in the deadline took effect the number of default events have significantly decreased and in the future, especially if T+2 will apply, they may see further room for setting a more favourable market deadline for clearing.
Guarantee funds (Exchange Settlement fund for spot market, Collective Guarantee Fund for derivative market)
EMIR defines mandatory standards with regard to the calculation of guarantee funds and KELER CCP will have to adhere to these rules resulting in some changes in the current processes. According to the regulations the results of the daily stress tests shall be the basis for the calculation. So far the amount of each guarantee fund was the sum of the individual contributions while in the future the daily stress tests will set the minimum total amount of the funds that will be broken down to individual clearing member level, rounded up to million HUF, pro rata to their initial margin contribution. Contributions will be calculated on the first settlement date of the month based and the payment will be due within 2 days of calculation. The maximum value of the contribution will cease to exist while the minimum contribution is set to be HUF 5mn.
EMIR requires the CCP company to conduct a confirmation test on a daily basis to determine if the size of the guarantee funds are sufficient. In case of negative results KELER CCP can order an extraordinary recalculation anytime during the month or collect supplementary margins from its clearing members whose exposures are the reason for the insufficiency. The deadline to meet the supplementary margin requirements is the following settlement day.
KELER CCP completed preliminary calculations that predict decrease in future guarantee fund contributions effective 1 July 2013.
Collaterals
Effective 1 July 2013 KELER CCP changes its collateral management rules. In case of JPY and PLN there will be a maximum limit of HUF 5bn and once this amount is reached at CCP level KELER will not accept further amounts in these currencies. HUF, CHF, EUR, USD and Hungarian government bonds will be accepted without any limitations. HUF, Mortgage bonds and corporate bonds will be no longer accepted and instead of the current BUX basket equities only the 5 most active blue chips (EGIS, MTELEKOM, MOL, OTP and RICHTER) qualify. Financial institution clients will not be in the position to provide bank guarantees anymore as collateral, other clients can continue with guarantees however with some limitations.
Impact on investors:
The above changes that are being implemented in line with EMIR directive will affect all clearing members in Hungary, including remote members of the BSE and MTS Hungary. Further communication in relation to the renewal of documentation will follow in due course.