Clearing and Settlement of

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Clearing and Settlement of spot bonds 03
February 2005 Brett Kotze
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The New Model
Matching
NEW SAFEMS
Clearing Members
Derivatives
Trade for margin
Icon
Spot trades
Matching
STRATE
Settlement agents
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Process flows
CLEARING MEMBER
COMMUNICATION
JSE SETTLEMENT AUTHORITY
COMMUNICATION
MONITOR COMMITS
MARGIN REQUIREMENT
ENTERS CORRECTIVE TRADES
PENALTIES
(RECONCILES TRADES WITH MATCH ORDERS RECEIVED
FROM STRATE
YIELD-X CLEARING SYSTEM
TRADE FOR MARGIN
TRADING ENGINE
TRADING MEMBER
ICON
COMMIT INTIMA- TIONS
MATCH ORDER NO
MATCHED TRADE
TRADE LEG
STRATE
CLIENT
TRADE AFFIRMATION
TRADE AFFIRMATION
Net SETTLE- MENT POSITION
COMMIT
SETTLEMENT AGENT
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Principles

• CENTRAL ORER BOOKS Anonymous orders matched
  on the central order book on the basis of
  time-price priority. This includes bonds
  and carrys. These are guaranteed by
  SAFCOM subject to challenge and price discovery
  of the central order book.
• REPORTED TRANSACTIONS Reported Transaction where
  terms and/or price are agreed
• (GUARANTEED) Off-Exchange and transaction
  is booked for reporting and
  settlement purposes. Clearing Members may
  accept these for risk management
  purposes following which SAFCOM will guarantee
  settlement.
• REPORT TRANSACTIONS Report Only Transaction
  where terms and/or price are agreed
• (NOT GUARANTEED) Off-Exchange and
  transaction is booked for reporting and
  settlement purposes, not accepted by the
  Clearing Member for risk management
  purposes, will not be guaranteed by the SAFCOM
• CYCLES Will be T3 Rolling
  Contractual Settlement, except for
• - Correction Trades (Equal
  Opposites)
• - SLB or Carrys to secure
  settlement

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Principles (Cont.)

• ALLOCATIONS On T, late allocations and
  allocation corrections done by Settlement
  Authority
• UNCONDITIONAL COMMIT Settlement Agents commits
  become unconditional at 12h00 on T2
  unless provisional sequestration

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Timelines
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Risk Management Structure Historically
MARKET RISK
CREDIT RISK
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Definitions
Market Risk The risk that adverse price
movements in the level or volatility of a price
may create an anticipated loss. For example, a
dramatic change in the interest rate during one
day may create the risk of loss. Credit
Risk The risk that a counterparty will not
settle an obligation for full value, either when
due or at a time thereafter.
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But what about settlement risk?
The guaranteeing of settlement of loan stock by
SAFCOM brings in a new element of risk to SAFCOM,
settlement risk Defined as - The risk that a
party will default on one or more settlement
obligations due to no funds or securities
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Risk Management Structure
SETTLEMENT RISK
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Risk and Margin Methodology
MARKET RISK - The Calm methodology was
developed specifically for Yield-X. It is a
conventional VaR (Value at Risk) calculation.
The parameters which Yield-X uses in this
calculation are one trading day (the loss is
estimated over the period to the end of the next
trading day) and 99.95 confidence level, which
equates to Initial Margin. SETTLEMENT RISK -
Using the Calm methodology with the resultant
figure computing to points per instrument, and
applying rands per point, which equates to
Settlement Margin.
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Market Risk versus Settlement Risk

• MARKET RISK
• Where offset is allowed between Forward Bonds
• Where offset is allowed between Derivatives and
  Forward Bonds
• All Derivative products
• Forward Bonds
• SETTLEMENT RISK
• Where there is SFIDvP
• Only on S-3 of the transaction

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Initial Margin versus Settlement Margin

• The calculation for both Initial Margin and
  Settlement Margin will be computed and the
  higher of the 2 will be taken on S-3
• The unsettled position will be Marked-to-Market
  on EOD T1, any short-fall will be requested
  as a Top-up Margin
• The Settlement Margin will be used as the
  Sweetener for Fails Management, i.e.
  Give-ups. Where Initial Margin is held (higher
  of the 2), surplus will be returned to the
  Clearing Member

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Trading Members / Clients

• Financial Instrument Principal (FIP)
• Principal Transactions
• Financial Instrument Traders (FIT)
• Principal Transactions
• Member Settled clients
• Non-Member Settled clients

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Securities Lending Borrowing

• SETTLEMENT AGENT SECURITIES LENDING AND BORROWING
  (SLB)
• Settlement Authority will book
• Identified as SLB on STRATE and Settlement Agent
  systems
• SETTLEMENT AUTHORITY
• Lender of last resort
• Identified as SLB on STRATE and Settlement Agent
  systems

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Questions