KELER CCP held a clearing member forum, at which events and achievements of 2014 and plans for 2015, KELER CCP’s new recovery concept as well as changes in KELER CCP’s risk management were discussed.
Here is a summary of the meeting results:
Recovery concept of KELER CCP
Following the introduction of the Bank Recovery and Resolution Directive, the same concept will also be introduced for financial market infrastructures like CCPs. It is based on EMIR, according to which the CCP’s capital should be maintained at all times, and consequently the own funds of KELER CCP cannot be used entirely to manage losses upon default and a default cannot directly result in the insolvency of KELER CCP.
Considering the uncertain legal environment, that lack of harmonisation between legal norms and the lack of EU regulations on CCP Recovery and Resolution, KELER CCP - when setting up its own recovery concept - took into consideration the current solutions available to institutions with EMIR license abroad, the "Recovery of financial market infrastructures" consultative report issued by CPMI and IOSCO, the EACH paper -"An effective recovery and resolution regime for CCPs", and the specifics of KELER CCP's markets.
As a result, KELER CCP’s recovery concept contains the following options:
- Covering losses from clearing member default:
- Cash call (participants are required to make payments of predefined amounts)
- Variation Margin Haircutting • Use of initial margin (i.e. the individual collaterals of the non-defaulting participants)
- Recapitalising the CCP with an advanced loan
- Tools to re-establish the matched book following a default:
- Voluntary / forced allocation of contracts
- Contract termination: tear-up (partial or complete)
The recovery concept follows the criteria set by CPMI and IOSCO by being: (i) comprehensive (all losses are allocated fully); (ii) effective (reliable, with sound legal basis); (iii) transparent, measurable, manageable and controllable; (iv) creating appropriate incentives and (v) minimising negative impact. Its main principles are as follows:
(i) the non-defaulting participants have no additional payment obligations; however, the receivables for which they have a legal claim (purchase price and variation margin credit) are not fully paid
(ii) the spot and the derivative markets are treated separately
(iii) the CCP might consider the different management of the proprietary and the client positions of the non-defaulting participants
(iv) the CCP takes into consideration the loss bearing capacity of the individual market participants
(v) the CCP would settle with the participant concerned any later return, in the individual account, in the proportion of the individual losses suffered during the period of recovery to the total losses
The proposed tools in the KELER CCP’s recovery concept are:
- In the spot markets: (i) covering losses: proportionately less purchase price will be paid; (ii) waiting for the expiration of the positions (maximum for 2 days).
- In the derivative markets: (i) covering losses with Variation Margin Haircut; (ii) closing of defaulting positions by:
- netting with close-out, closing of the positions of the defaulting party, porting
- voluntary auction among the clearing members
- forced allocation with position transfer among the clearing members
- position termination
KELER CCP’s Board of Directors manages the recovery process given that the final responsibility for the decision made rests with them.
Changes in risk management
The calculation algorithm of the default funds (TEA: Exchange Settlement Fund, KGA: Collective Guarantee Fund) will be modified in line with EMIR and ESMA requirements. As a result, the size of the default funds will increase. ESMA will have to accept the new concept before the changes become effective, which is expected to take place in Q2 2015.
The main change in the calculation is the implementation of procyclical factor. On one hand, it will increase the size of the default fund (which has continuously decreased since 2013), while on the other hand it will stabilise its size by avoiding rapid changes. KELER CCP wishes to operate a stable and predictable default fund in the long run, which is achievable with the new calculation/factor.
The size of the default fund is expected to increase by approximately HUF 1 billion (close to EUR 3.3 million) as a result of the contribution at market level. The increase will be steady and take place within a year. In the meantime, due to market conditions, there was a significant margin decrease, the effect of which is approximately HUF 1.4 billion (close to EUR 4.6 million). The total net effect of the changes in the default fund calculation method led to significant liquidity being released to clearing members.
The expected effects of a stress period are: (i) potential margin increase; (ii) potentially no obligation to top off the default fund; (iii) likely no necessity to reduce the spread discounts (in times of stress correlations tend to increase).
Events and achievements 2014 and plans for 2015
- KELER CCP started its trade reporting service in February 2014, which was complemented by the reporting of trade values and changes in collaterals from August 2014
- the reported number of OTC transactions was almost double the Stock Exchange transactions, nearly two-thirds of the clients on behalf of which KELER CCP makes reports operate in the capital market and around one-third of these clients are non-residents
- from January 2014 all legal entities can obtain LEI code directly from KELER and from January 2015 all LEI codes can be renewed through KELER, irrespective of the issuer of the LEI code or whether the original LEI code was issued by KELER or not
- the CCP obtained its EMIR licence in July 2014 and in line with this, the capital of the CCP was increased and the joint and several liability provided by KELER for the CCP was terminated
- the supervision and oversight of the Central Bank of Hungary was supplemented by a new Supervisory College with the presence of ESMA
- KELER CCP founded its Luxembourg based subsidiary to provide better service for the energy markets, and it will start operating in Q3 2015
- in October 2014 the change to the T+2 settlement cycle for equities was successfully completed
- the clearing membership fees changed from 1 January 2014 when the tiered fee structure was also introduced in the case of the BSE multinet cash market, BSE default fees were increased as well
- the client satisfaction survey conducted in 2014 resulted in a high score of 88.3% with respect to clearing services
- in 2015 the CCP will count and credit the multinet fee discount continuously, the tiered fee structure will also be introduced for the standard derivative financial products
- KELER Group plans to renew its websites in 2015
Impact on clearing members only
As a result of the introduction of the recovery concept, the own funds of KELER CCP cannot be used entirely to manage losses upon default and thus a default cannot directly result in the insolvency of KELER CCP. This will change the default management process of KELER CCP, expected to take place from Q2 2015. The calculation algorithm of the default fund also will change through the implementation of procyclical factor, which will lead to an increase in the size of the default fund. These changes, however, will have an impact on clearing members only.
Senior Relationship Manager, GSS Hungary