Overview, Functionalities, Control and Check on NCSS by

1
Overview, Functionalities, Control and Check on
NCSS by
NCCPL
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED
2
The Companys Overview
3
BACKGROUND

• NCCPL NCSS Design
• In March 1999 the Capital Market Project
  Consultants (Arthur Anderson Co.) were mandated
  to develop recommendations for a National
  Clearing and Settlement System (NCSS).
• Accordingly various committees were formed
  comprising of representatives from the three
  Stock Exchanges, CDCPL and users.
• Based on recommendations submitted by
  consultants, deliberation of the committees and
  subsequent approvals from the three Stock
  Exchanges and SECP, System design was finalized
  in October 2000.

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BACKGROUND Contd

• NCCPL - Incorporation Implementation
• The NCCPL was incorporated on July 03, 2001 to
  provide Independent Clearing Settlement
  Services to all the three Stock Exchanges in
  Pakistan.
• NCSS Live operations were commenced from December
  24, 2001.
• Initially the company was managed by CDC.
• Since July 01, 2005, the Company complete severed
  itself from CDC and now has his own management.

5
Organization Structure of NCCPL
6
NCCPL - Legal Frame Work

• The operations of NCCPL are governed by the
  following
• NCSS Regulations 2003
• NCSS Procedures 2003
• Clearing House Companies (Registration and
  Regulations) Rules 2005 and
• Companies Ordinance, 1984

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Corporate Governance

• Board of Directors
• The Board of the Directors comprises of 11
  Directors of which 9 are appointed by the
  shareholders,1 is nominated by the SECP and the
  CEO by virtue by his office.
• Code of Corporate Governance
• The Company has voluntarily adopted the Code of
  Corporate Governance to implement good governance
  practices. These inter-alia include
• Forming an Audit Committee of the Board
  comprising of non-executive directors
• Appointment of Chief Internal Auditor, Chief
  Financial Officer and Company Secretary by the
  Board
• Holding the number of the Board Meetings as
  recommended by the Code
• Issue of Quarterly, Half yearly and annual
  financial statements
• Cont

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Corporate Governance

• Circulation of Statement of Ethics and Business
  Practices to establish a standard of conduct for
  directors and employees of the Company
• Adopting of vision/mission statement and overall
  corporate strategy by the Board and
• Hold presentation for the orientation of
  directors, as required by the Code

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Corporate Governance Cont..

• I.T. Steering Committee
• The Company also has a I.T. Steering Committee
• deliberate IT related strategies and policies
• Committee Comprising of experts from stock
  exchange and Financial Institutions.

10
NCCPL Shareholding Structure
11
Companys Achievements

• Following major achievements have been
  accomplished by the Company
• Independent management
• Registration under Clearing House Companies
  (Registration and Regulations) Rules 2005 on
  March 7th, 2006
• Appropriation of Rs 100 million as initial
  contribution towards Clearing and Settlement Fund
  as required by the above Rules
• Formation of Clearing Settlement Fund Trust
• Successful implementation of Unique
  Identification Number (UIN) functionality on the
  National Clearing Settlement System (NCSS)

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Companys Achievements Cont

• Introduction of mechanism for Cash Settled
  Future Contracts (CSFC) to collect and disburse
  marked-to-market losses and profit through its
  NCSS Pay Collect Functionality
• Implementation of Institutions Delivery System
  (IDS) functionality to Institutions for Clearing
  and Settlement of their regular trades directly
  through National Clearing and Settlement System
  (NCSS)
• Modifications in NCSS to facilitate Unified
  Trading System (UTS) Platform for LSE and ISE
  members for execution of their trade and
  transaction on the same unified trading System
  (UTS).
• Establishment of DR/BC site along with Branch
  Office

13
Companys Achievements

• Independent IT Set-Up effective from July 01,
  2007
• Procurement of Server and Hardware
• Implement Network infrastructure and connectivity
  
• Establish four Data Centers

14
Future Projects

• Following are the major upcoming future ventures
• Implementation of CFS MK-II through NCCPL
• Risk Management of Financial Institutions
• Recording Settlement of Futures Market
  Contracts Through NCSS
• Establishment of Companys Owned Head Office
• Issuance of Share Capital

15
Major Challenges

• Hiring of appropriate Human Resource
• Space constraint

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NCCPL Data Centers

• Main Data Centre at Head Office in KSE
• Business Continuity Site in Karachi
• Branch Data Centers at Offices in LSE and ISE

17
Network Links

• Intercity connectivity through 1-MB DXX
  connectivity through PTCL
• First-level Redundancy through Frame Relay link
  (provided by Supernet)
• Second-level Redundancy is available through ISDN
  lines
• All these links are available at Head Office, BC
  Site, Lahore Office and Islamabad Office
• Head Office and Business Continuity Site are
  connected through Dark Fiber

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Remote Access

• Clients in KHI, LHE and ISB who do not have
  offices in KSE, LSE or ISE have the option to
  dial in to the network of NCC
• They have the option to use normal phone lines
  (56 kbps) or ISDN-BRI lines (128 kbps)
• Redundant PRI lines have been provided in each
  office for remote connectivity
• Also, the PRI lines available at Main and BC
  sites can be used as backup of one another

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Business Continuity

• Business Continuity site shall be fully
  functional in July 2007.
• All business data shall be copied to the BC site
  in real time thereby ensuring zero-loss of data.

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Network Resilience

• In case of unavailability of NCC Data Centre in
  KSE, the network provides seam less connectivity
  for KSE with the BC Site of NCC
• In case of unavailability of NCC Data Centre in
  LSE/ISE, the network provides seam less
  connectivity for LSE/ISE with the Main/BC Site of
  NCC

21
System Security

• All transactions between Clients and business
  machines are encrypted through VPN tunnels
• All client machines are installed with host-based
  security software which eliminates any malicious
  activity as well as protects against viruses,
  spam, etc.
• During next quarter, we plan to provide Digital
  Certificates stored on Smart Cards to all our
  clients. These certificates shall be used
  initially for User and Terminal Authentication,
  and later on Transactional Non-repudiation will
  be implemented in NCSS through the digital
  signatures.

22
High Availability

• Most of the networking equipment has been
  implemented in highly-available configuration
• For example, if one firewall goes down the other
  firewall continuously provides the protection
  without any interruption to the business activity

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• National Clearing Settlement System (NCSS)
  Overview

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Major Benefits of NCSS

• Cross Exchange Netting for both cash
  securities.
• Automated Pay Collect
• No physical receipt / issuance of instruments
• Automated process of securities settlement
  directly between CMs.
• Settlement of non-broker institutions for CFS
  transactions directly with NCSS.
• contd

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Major Benefits of NCSS
cont

• Settlement of broker to broker transactions
  directly with NCSS to facilitate transactions of
  brokers of different exchanges.
• Cross Exchange Netting for both cash securities
  for CMs who are members of more than one Stock
  Exchange.
• Margin Financing through independent module on
  NCSS.
• Settlement of net obligations directly between
  CMs as per undisclosed Balance Orders.
• Registration of Unique Identification Number
  (UIN) of all clients with codes

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NCSS Operational Highlights
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NCSS - Operational Highlights
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NCSS - Operational Highlights
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NCSS - Operational HighlightsHighest Ever
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Statistics
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Statistics
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Statistics
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Types of Trades/Transactions on NCSS

• Exchange Trades and Transactions
• Exchange Trades are
• Locked-in contracts between broker CMs executed
  through Exchange trading system in the Regular
  Market
• Exchange Transactions are
• Locked-in contracts between broker CMs executed
  through Exchange trading system in the Continuous
  Funding System (CFS) Market.
• Net-buy or net sell position of broker CMs based
  on their futures contracts at the close of
  Futures Contract Period transmitted to NCSS for
  settlement.

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Types of Trades/Transactions on NCSS

• Non-Exchange Transactions
• Broker to Broker (BTB) Delivery Module provides
  the facility of recording non-Exchange
  transaction between broker CMs of different
  exchanges based on underlying exchange trades.
• Institutional Delivery System (IDS) provides the
  facility of recording non-Exchange transactions
  between broker CMs and non-broker CMs based on
  underlying Continues Funding System (CFS) .
• Margin Financing (MF) module facilitates Broker
  CMs to arrange funds from other Broker /
  Non-broker CMs based on their purchases.

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Types of Trades/Transactions on NCSS

• Broker to Broker (BTB)
• BTB module facilitates Broker CMs in settling
  their inter-exchange transactions. Whereby a
  Broker CM, based on his underlying exchange
  trade, initiates BTB transactions while the other
  Broker CM affirms it. Once a transaction is
  affirmed, the settlement obligation of the
  initiating Broker CM is passed onto the affirming
  Broker CM.
• 1.1 Initiation Process
• Under this module
• A BTB transactions can only be initiated by
  Broker CM of one Exchange to the Broker CM of
  another Exchange for affirmation
• 1.2 Affirmation Process
• A counter Broker CM can affirm the initiated
  transactions. However, the affirming Broker CM
  cannot edit the details of transactions posted by
  the initiating CM. Upon affirmation the
  settlement obligation of the initiating
• Broker CM is passed onto the affirming Broker
  CM.

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RECORDING OF BTB TRANSACTIONS ON NCSS
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Types of Trades/Transactions on NCSS

• Institutional Delivery System (IDS)
• IDS module facilitates a Broker CM and a
  Non-broker CM to record their CFS transactions in
  settling their exchange transactions directly
  through the NCSS. Once a transaction is affirmed,
  the settlement obligation of the initiating
  Broker CM is passed onto the affirming Non-broker
  CM. IDS transaction is based on locked-in
  Continuous Funding System (CFS CFSR)
  transactions traded by a broker CM at an
  Exchange.
• 1.2 Initiation Process
• Under this Module
• An IDS transactions can only be initiated by
  Broker CM to a Non-Broker CM for affirmation
• 2.2 Affirmation Process
• A counter Non-broker CM can affirm the initiated
  transactions. Upon affirmation the settlement
  obligation of the initiating Broker CM is passed
  onto the affirming Non-broker CM.

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Types of Trades/Transactions on NCSS
RECORDING OF IDS TRANSACTIONS ON NCSS
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Types of Trades/Transactions on NCSS
RECORDING OF MF TRANSACTIONS ON NCSS
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Types of Trades/Transactions on NCSS
RECORDING OF MFR TRANSACTIONS ON NCSS
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Settlement Options
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Prerequisite for Broker CMs on NCSS Single Trader
ID
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Prerequisite for Broker CMs on NCSS Multiple
Trader IDs

• CMs Accounts

CDS Account with CDC
KSE Trader Id LSE Trader Id ISE Trader
Id (Membership Ids)
Settling Account with SB
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Securities

• Eligibility
• CDS live Securities listed at any Stock Exchange
• Trading Symbol
• Trading symbols are allocated by NCCPL to NCSS
  live securities.
• Marketable lot
• Marketable lots are determined by NCCPL as per
  following criteria.
• Face Value Market Value Marketable Lot
• Upto Rs. 10 Upto Rs. 50 500 shares
• Upto Rs. 10 Greater than Rs. 50 100 shares
• Greater than Rs. 10 Any market value 20 shares

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Settlement Flow in NCSS
T
T2 SD-1
T3 SD
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Delivery Schedule

• CMs to deliver securities to buying CMs by 1200
  noon for getting credit within Banks Cash
  Counter Timings.
• CMs to deliver securities to buying CMs by 330
  PM for getting credits by 430 PM.
• Remaining CMs to deliver securities to buying CMs
  by 415 PM for getting credits with next
  Settlement Date Pay Collect.

49
Balance Order

• Balance Orders in NCSS are computed on net basis
  for the following transactions of a CM
• Exchange Trades/Transactions
• Regular Market Trades
• Future Market Trades
• CFS Market Transactions
• Non-Exchange Transactions
• Broker To Broker (BTB)
• Institutional Delivery System (IDS)
• Margin Financing (MF)

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Balance Order Netting Mechanism

• Balance Order (BO) is based on Multilateral
  Netting Mechanism prioritized as under
• Netting of sell and/or buy positions of CM having
  multiple Exchange memberships.
• Sell and buy positions matched among CMs of same
  Exchange.
• Remaining sell buy positions are matched among
  CMs of different Exchanges.

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Delivery Default Management

• CMs who fail to deliver securities till 415 PM
  to be considered delivery defaulting CMs.
• Failed deliveries are reported to respective
  Exchange for squaring-up.
• Respective Exchange to square-up failed
  deliveries by 1130 AM next Trading Day.
• Buying CMs who have already made the payments to
  get failed deliveries by 200 PM, if squared-up
  on next Trade Day.
• Failed delivery is tried to be squared-up till
  Settlement Date 1, otherwise, its best market
  value is returned to buying CMs.

52
NCSS Pay Collect

• CMs having payable, to pay by 1200 noon on
  Settlement Date.
• CMs having receivable, to receive by 130 PM,
  provided they discharged all their delivery
  obligations.
• CMs becoming liable due to short delivery
  reverses to pay by 410 PM.
• In case of money default, NCCPL shall apply money
  default procedures.
• Remaining CMs having receivable after
  short-delivery reverse, if any, to receive by
  430 PM.
• Settling Banks to online confirm payments
  collections through NCSS by the Designated Time.
• 
  

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NCSS Pay Collect

• Advantages of NCSS Pay Collect
• Automated money settlements
• Same day credits to CMs
• Settlement of amount net of clearing obligations,
  squaring-up obligations and Tariff etc and
• Single net settlement for CMs who are members of
  more than one Stock Exchange.

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Money Default Management

• Non-Payment by a Clearing Member (CM)
• Payment should be made by CM on the settlement
  day till the specific time.
• Payment Notice of 30 minutes shall be delivered
  in case of non-payment.
• Suspension or restriction in case of failure to
  comply with said notice

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Money Default ManagementActions taken by a
Company in case of Suspension or Restriction

• Exchange-wise Money Obligation
• Segregation of Stock Exchange-wise net money
  obligation of a defaulter CM.
• Allowing proportionate netting of receivables
  with payables at different Stock Exchanges.
• For this purpose, Non-Exchange transactions shall
  be segregated to the Stock Exchanges where
  originally initiated.

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Money Default ManagementActions taken by a
Company in case of Suspension or Restriction

• Sources to recover the shortfall
• Utilize 50 amount of Security Deposits of that
  Exchange of which defaulter is a member.
• Above Security Deposit can only be utilized
  against 85 of the value of securities retrieved
  or received by the Company of a defaulter CM.
• Funds obtain from Stock Exchanges to cover the
  short fall.
• For Non-Exchange transactions, Stock Exchange of
  initiating Broker CM shall arrange such fund.
• Hold back the proportionate amount of credits of
  CMs who are member of respective Exchange and to
  those CMs who were involved in the Non-Exchange
  transactions with the defaulting CM.

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Money Default ManagementActions taken by a
Company in case of Suspension or Restriction

• Determination of Final Loss
• Square-up/close out the unsettled positions and
  determine the final loss.
• Serve final loss notice to defaulter CM to pay
  such amount by the next business day.
• Declaration of CM a Defaulter by a Stock Exchange
  or by the Company.

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Risk Management

• Exposure Monitoring and Management by the
  Respective Exchange
• Presently, Stock Exchanges monitor and collect
  margins on CMs exposure and mark to market
  requirements for all NCSS eligible securities.
• 
  
• 
  cont.d

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Risk Management cont...

• NCSS Controls and Checks
• Movement of Securities
• Bought securities are delivered to buying CMs
  CDS main accounts in blocked status.
• Blocked securities are available to buying CMs
  CDS main accounts after discharging their
  obligations.
• Short Deliveries Debits
• In case of short deliveries by 330 PM, system
  additionally debits CMs accounts with the
  previous day Closing Prices (i.e., System Prices)
  with 15 margin of late/fail deliveries.
• Retrieval Securities
• In case of money default by CM, blocked
  securities in his CDS main account are retrieved
  by NCCPL for selling-out.

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Risk Sharing mechanism in case of default

• Exchange trades and transactions
• Net Security-wise losses of defaulter CM are
  recovered from other CMs involved in the
  respective Securities in proportion of their
  volumes.
• Claims against allocated losses to be settled by
  the respective Exchange out of the assets of the
  CM in its custody.
• Non-Exchange transactions through BTB, IDS MF
• Net losses of Defaulter CM against his counter
  CMs are recovered from such counter CMs.
• Counter CMs claims against recovery are
  proportionately entertained from Security Deposit
  with NCCPL.

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UIN Functionality on NCSS

• Background
• The revised functionality of Unique
  Identification Number (UIN) was discussed in the
  various discussions meetings among the
  representatives of Securities Exchange
  Commission of Pakistan (SECP) and National
  Clearing Company of Pakistan Limited (NCCPL)
• The purpose was to maintain the integrity of the
  UIN Database to eliminate the changes of any
  erroneous entries in future and clean the
  existing UIN Database
• The UIN system is based on UIN Procedures dated
  April, 03, 2006 and subsequent amendments herein
  approved by the SECP from time to time

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Client Types in NCSS

• Individual Pakistani Citizen
• Individual Foreigner/overseas Pakistani
  citizens/Non-Pakistani residing in Pakistan
• Non-individuals
• Corporate/individual - Broker
• Corporate Company
• Corporate fund/other organization

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UIN Registration Details

• Client Name
• Appropriate UIN
• Client Code/Client ID issued by the Broker
• Client Type

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How UIN Functionality will Work?

• All members of the exchanges will enter the
  registration details along with their client
  codes through the mapping table on National
  Clearing Settlement System (NCSS).
• All the registration details will be provided to
  the Stock Exchanges at end of day.
• Stock Exchanges will link up the registration
  details with the trading systems at their end and
  it will be mandatory for the members to enter
  client code / ID while placing any order in the
  trading system.
• The trading systems of the stock exchanges will
  verify the client code / ID with the UIN
  registration details on Pre-trade basis and will
  reject any order failing this validation.

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UIN Registration for Individuals

• Client Type- Individual Pakistani Citizen
• The Broker Clearing Member (BCM) will first
  select Client Type Individual Pakistani Citizen
• The BCM then enter the CNIC of a client along
  with the relevant details (other than name)
• If the CNIC exists in the UIN Database, the name
  of such client will appear automatically and the
  BCM can Save/Past such record
• If the CNIC does not exists in the UIN Database,
  then the BCM will also enter the name of such
  client. Upon saving, such record(s) will be
  marked with status PENDING
• The records with status PENDING will be
  displayed in the Admin List Screen for approval
  or rejection by the Company

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UIN Registration for Individuals

• Client Type- Individual Pakistani Citizen
• The Company will verify the CNIC from a system,
  provided by NADRA and mark the status APPROVED
  for valid CNIC. In case, where CNIC does not
  verify from the NADRA , this will be marked with
  status REJECTED
• The BCM can see the reasons for each rejected
  record in the UIN Setup Screen and can change the
  UIN and Name of such unverified record and
  resubmit to the Company for verification
• The Company will follow the same process of
  verification as mentioned above
• The APPROVED records will become part of UIN
  Database
• The same scheme will be applicable where the
  joint holder accounts are created

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UIN Registration for Individual Foreigner

• Client Type -Individual Foreigner/overseas
  Pakistani citizens/Non-Pakistani residing in
  Pakistan
• The Broker Clearing Member (BCM) will first
  select Client Type Individual Foreigner/overseas
  Pakistani citizens/Non-Pakistani residing in
  Pakistan
• The BCM then enter the UIN of a client along with
  the relevant details (other than name)
• If the UIN exists in the UIN Database, the name
  of such client will appear automatically and the
  BCM can Save/Past such record
• If the UIN does not exists in the UIN Database,
  then the BCM will also enter the name of such
  client.
• The BCM shall also submit the attested copies of
  UIN documentary evidence to the Company

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UIN Registration for Individual Foreigner

• Individual Foreigner/overseas Pakistani
  citizens/Non-Pakistani residing in Pakistan
• The Company will verify the UIN from the
  documentary evidence and mark the status
  APPROVED for valid record. In case, where UIN
  does not verify from the document, this will be
  marked with status REJECTED
• The APPROVED records will become part of UIN
  Database
• The same scheme will be applicable where the
  joint holder accounts are created

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UIN Registration for Non-Individuals

• Client Type- Non-individuals
• The Broker Clearing Member (BCM) will first
  select the category from Client Type
  Non-individuals
• The BCM then search the Name of a client from UIN
  Database
• If the Name exists in the UIN Database, the UIN
  and Name of such client will appear automatically
  and the BCM can Save/Past such record
• If the Name does not exists in the UIN Database,
  then the BCM shall submit its request to the
  Company on prescribed format along with the UIN
  documentary evidence duly attested by the BCM

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UIN Registration for Non-Individuals

• Client Type- Non-individuals
• The Company shall verify the UIN and Name from
  the documentary evidence provided by the BCM.
  Upon verification, the Company shall incorporate
  such information in the UIN Database and the BCM
  can register such client through a process
  mentioned above
• The Company may, however, reject any such
  record(s), and such information shall not be
  included in the UIN Database.
• The same scheme will be applicable where the
  joint holder accounts are created

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FI Margining by NCCPL

• Background
• By the implementation of Client Level Netting
  (CLN) the Broker Clearing Member (BCM) are under
  burden of excessive margin payable to the
  Exchange for their Institution Clients.
• It was decided to collect margin directly from
  Financial Institution (FI) on their affirmed IDS
  transaction based on Regular and CFS market
  trade/transactions.
• FIs are presently beyond the scope of ambient of
  the Exchange to impose out obligation on them.
• As most of the FIs are familiar with NCSS and
  have direct relationship with NCCPL as a
  Non-Broker Clearing Member (NBCM) it was proposed
  that it is appropriate that NCCPL would collect
  margin from FIs

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FIs Margining Process

• All FIs are required to obtain a status of
  Non-Broker Clearing Member (NBCM) from NCCPL.
• After their admission as NBCM, they become
  eligible to affirm Institutional Delivery System
  IDS transactions based on Ready and CFS market
  trade/transactions.
• Upon affirmation of IDS transactions, NCCPL shall
  collect Value at Risk (VaR) based margins against
  exposure Mark-to-Market (MTM) losses from
  NBCMs.
• All NBCMs are required to pay collateral against
  exposure margin MTM losses to NCCPL with in
  stipulate time .

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FIs Margining Process Contd..

• Collateral shall be in the form of cash, Approved
  Securities, Bank Guarantee or Irrevocable
  Undertaking.
• All BCMs would pay collateral to the Exchanges on
  trade/transactions executed on behalf of FIs
  client in Ready and CFS market.
• Once the FIs deposited collateral against
  affirmed IDS transactions, NCCPL will provide the
  Broker side information of such underlying
  trade/transaction to the relevant Exchange(s).
• The Exchange(s) will adjust the exposure of their
  Brokers based on the information, provided by
  NCCPL

74

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CFS Vs CFS Mk II
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CFS Vs CFS Mk II
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CONTINUOUS FUNDING SYSTEM - CFS Mk II

• Benefits of CFS Mk II
• Transparent and efficient financing for the
  market.
• Level playing field for investors and brokers
• Risk management concentrated in NCCPL.
• Institutional bulk pool of funds available for at
  least 90 days.

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Eligible Participants Financier

• Categories of AFs
• Non Broker AFs (NBAF)
• Broker AFs (BAF)
• All eligible financiers to acquire AF status from
  NCCPL.
• AF premises fitted with NCCPLs automated
  terminal, enabling real time financing.

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Eligible Financiers to CFS Market

• All Scheduled Banks
• Mutual Funds
• Special purpose CFS financing Mutual Funds
• NBFCs
• Insurance companies
• DFIs
• Brokers, both corporate and individual
• Any other Corporate Entity as may be approved by
  the NCCPL Board of Directors.

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Eligible Participants Finance

• Brokers are the only takers of finance from CFS
  market on behalf of their clients and for their
  own account.

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Modus Operandi for CFS- MK II

• Specified shares plus desired rate of return
  required by Financier input into system.
• All offers and bids transparently displayed on
  system.
• Finance able to place own bid for acquiring
  financing.
• Trading done on undisclosed basis.
• CFS contract will be for 22 working days.
• On expiry of 22 working days, CFS contract
  automatically be liquidated and finance forced
  released.
• No IDS facility shall be allowed to FIs in the
  stock market where they fund the CFS market
  through brokers.
• NCCPL to conduct pre-CFS trade verification.
• All acceptances of finance by inserting unique
  client codes registered on UIN system.
• Continuous transactional and systems audit and
  findings made public.

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Certainty of Funding

• Mandatory on Financier to lend committed amount
• Financier locked in on each contract for 22
  working days.
• AF may provide additional funds over and above
  committed amount. Advance notice of 22 working
  days for withdrawal of additional funds.
• Amounts invested in any eligible share at the
  financiers discretion.

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Important Statistics to be made available to the
general public on periodic basis, such as

• Utilized committed lines
• Total funds due to be released in next 3 days on
  maturity of CFS contracts
• Number of financiers and finances in the market

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Cost of Finance

• Market forces of demand and supply to determine
  cost of finance.
• AFs can lend below the commitment rate.
• Commitment Rate is 30-days KIBOR plus 4
• Offered interest rate determined by each
  individual Financier based on his own risk
  assessment of each scrip

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Risk Management and Capital Adequacy Regime

• Current Risk Management and Capital Adequacy
  Regime applicable to CFS Mk II.
• Mark-to-market losses to be collected in the form
  of cash.

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Acceptable collateral

• Shares of listed companies
• Undertaking by FIs rated AA and better
• Treasury Bills and PIBs (at later stage)
• Bank Guarantee
• Cash

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Eligibility Criteria for scripts in CFS Mk II

• Eligibility Criteria to be developed by NCCPL
  based on parameters such as
• Average daily impact cost
• No. of days traded in last 3 months
• Free float etc.

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Position Limits

• Scrip-wise position limit imposed is as follows
• Market wide position limit 40 of free-float for
  each scrip.
• Member wide position limit 10 of free-float of
  the scrip.
• Client wide position limit 5 of free-float of
  the scrip. (Client position will be universal and
  determined on UIN basis)
• Member Capital Adequacy 15 times the NCB of
  member

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Default Management in CFS MK-II

• Where Authorized Financier (AF) or Financee fails
  to settle its money obligation on a settlement
  day by 12 noon, the NCCPL shall issue a
  30-minutes notice to such AF or Financee as the
  case may be.
• Where such AF or Financee fails to settle its
  money obligation within 30-minutes, the NCCPL
  shall suspend them and this information shall be
  disseminated to all the Stock Exchanges.
• The respective Stock Exchange(s) shall also
  suspend such AF (in case of BAF) or Financee in
  all markets namely Ready and Futures markets.
• The NCCPL shall take following steps to complete
  the settlement
• The securities held in the CDC Blocked Account of
  suspended AF shall with immediate effect stand
  transferred in the name of NCCPL
• 
  
• cont.

90
Default Management in CFS MK-II

• Collateral held against exposure margins and MTM
  losses of such suspended AF or Financee will be
  utilized
• The NCCPL shall arrange financing against the
  retrieved securities and securities deposited as
  collateral
• Utilization of CFS Protection Fund.
• The NCCPL shall ask the relevant Stock Exchange
  (s) to provide the shortfall amount as per their
  regulations and
• If the cumulative amount mentioned above is not
  sufficient, the NCCPL shall hold the
  proportionate amounts according to the
  receivables due to all Clearing Members on that
  settlement day and
• cont.

91
Default Management in CFS MK-II

• In order to proceed further the NCCPL shall refer
  the case to the Default Management Committee
  which comprises of the MD and Chairman of the
  relevant Exchange and NCCPL and nominee from
  Banking Association and MUFAP
• In consultation with the aforementioned
  Committee, the NCCPL shall net-off all unsettled
  positions of all the market in each security and
  determine the security-wise net positions for
  squaring-up/closed-out. However, in case of
  default by AF, all his first ticket purchase
  contracts will be funded by NCCPL and would be
  closed out when released by the Financee(s)
• The NCCPL shall square-up the securities in the
  ready market of the relevant exchange.
• 
  
  cont.

92
Default Management in CFS MK-II

• Where, the NCCPL is unable to square-up such
  securities in the regular market of the relevant
  exchange, the NCCPL shall square-up such
  securities through a system whereby all Clearing
  Members (including Non-Brokers) can make a bid
  for such securities directly.
• Where the shortfall still remains after the
  completion of squaring-up procedure the NCCPL
  shall after determining the final loss serve a
  Final Loss Notice to such suspended AF or
  Financee.
• Where the suspended AF or Financee fails to
  comply with the said notice, the NCCPL shall
  declare it to be a Defaulting AF or Financee.
• Consequently, the relevant exchange(s), shall
  also declare such AF (in case of a BAF) or
  Financee to be a defaulter in all markets namely
  Ready and Futures markets
• 
  
  cont.

93
Default Management in CFS MK-II

• After the declaration of default, the assets of
  such defaulting AF (in case of a BAF) or Financee
  under the control of relevant stock exchange such
  as Membership Card and Room etc shall be
  liquidated and the proceeds shall be
  proportionately allocated to all the markets.
• In the event there are still unmet losses, the
  NCCPL shall determine the balance amount
  exchange-wise, market-wise and security-wise.
• After determination of the final loss it will be
  allocated on a pro rata basis to all AFs who hold
  open positions in that particular security of CFS
  Mark II.

94
Roadmap for CFS Mk II Implementation
95
Roadmap for CFS Mk II Implementation Cont.
96
Thank you !
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED
8th Floor, Karachi Stock Exchange Building, Stock
Exchange Road, Karachi 74000 Pakistan
TEL [phone] FAX [phone]
0827 E-Mail lukman_at_nccpl.pk Website
http//www.nccpl.com.pk