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Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF)

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Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF) July 4, 2009 Korea Securities Depository Thank You! Hyun Chul Cho ... – PowerPoint PPT presentation

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Title: Collateral Management 11th ACG Cross Training Seminar, Dhaka (New Business Initiative TF)


1
Collateral Management11th ACG Cross Training
Seminar, Dhaka(New Business Initiative TF)
  • July 4, 2009
  • Korea Securities Depository

2
KSD Collateral Management
  • Contents
  • KSD Collateral Management Services
  • Pledging Service
  • KRX Futures Substitute Securities Management
  • Collateral Management for OTC Derivatives
    Transactions
  • Secured Call Collateral Management Services
  • Repo Collateral Service
  • Securities Lending Borrowing Collateral Service

3
KSD Collateral Management Services
Transactions related
  • KSDs collateral management services are related
    to the following transactions.
  • Participants request to set pledge
  • KRX(Korea Exchange) Derivatives Trades
  • OTC Derivatives Trades
  • Secured Call Transactions
  • Repo Trades
  • Securities Lending Borrowing

4
Participants Request to Set Pledge
Participants request for Pledge
  • On a participants request, KSD set pledge on
    deposited securities on a book-entry basis.
  • Trades related to participants pledge request
  • Participants usually request pledge to secure
    loan between the participants, however, KSD does
    not examine the underlying transactions for
    pledge between the participants
  • Pledgee can withdraw or transfer the pledged
    securities, but pledger needs pldegees consent
    to cancel the pledge and withdraw or transfer the
    securities.
  • Income Entitlements
  • Dividends, bonus shares, interest, and other
    income entitlements from pledged securities are
    delivered according to the prior agreement
    between the pledgor and pledgee.

5
KRX Futures Substitute Securities Management
KSD services for Exchange traded Futures
  • Investors of futures or options listed in the
    KRX(Korea Exchange) deposit margin with cash or
    substitute securities instead of cash.
  • KSD receives and safekeeps the substitute
    securities. KSD provides right exercise services
    for the investors.
  • KRX performs mark-to-market for the substitute
    securities. KSD provides deposit and withdrawal
    services in accordance with the information on
    necessary amount of margin.
  • KSD began the service in March 1999.
  • Eligible substitute securities listed stock,
    listed bond, etc,.
  • Related parties Investors(clients of futures
    company), futures companies, KRX

6
KRX Futures Substitute Securities Management
KSD Service Procedures
  • Account Opening Opening of Participant Account
    for futures companies and client accounts for its
    clients
  • Deposit of substitute securities KSD notifies
    KRX of securities information, amount, and
    substitute amount of substitute securities after
    the deposit is completed.
  • Withdrawal of substitute securities In case
    where the total amount deposited by the
    participant exceeds the required amount, the
    participant can request withdrawal. KSD notifies
    KRX and the participant of the information on the
    withdrawal
  • Entitlement Processing KSD processes the
    exercise of rights arising from substitute
    securities for futures companies.

7
Collateral Management for OTC Derivatives
Transaction
KSD Services
  • Collaterals for OTC derivatives transactions are
    deposited with the KSD for their management
  • Service started in September 2002
  • Eligible collateral
  • Stocks listed on KRX
  • Bonds evaluated by credit rating agencies
    designated by the Governor of the Financial
    Supervisory Service(FSS)
  • Cash Korean Won, US dollar
  • Participants securities firm, bank, foreign
    financial institution, etc.
  • KSDs collateral management
  • Custody of collateral
  • Processing entitlements to collateral
  • Establishing or canceling pledges
  • Valuation of collateral and mark-to-market
  • Processing collateral substitution or exchange

8
Collateral Management for OTC Derivatives
Transaction
Pledgor
Pledgee
OTC Derivatives Transaction
KSD
Request Of Pledge
Details Of Pledge
Matching
Assigning Identification Code
Registering Details of Pledge
  • Traders of OTC Derivatives enter details of
    pledge(counterparty, trade value,
  • pledged securities/cash, etc.) into KSD
    collateral management system
  • KSD system verifies that both requests are
    matched
  • If those are matched KSD system assigns ID code
    to the transaction, registers it
  • into KSD system, and begins collateral
    management.

9
Collateral Management for OTC Derivatives
Transaction
Cash collateral Information
Stock market (Closing price of Previous day)
Bond Rating Companies (Valuation of bonds)
Mark-to-market System
Pledgor
Pledgee
Details of collateral revaluation and margin call
if necessary
10
Collateral Management for OTC Derivatives
Transaction
Automatic Closing
Expiration of Collateral Management Period
C L O S I N G
Transferring collateral To Pledgor
Failure in Margin Call
Failure to fulfill requirement
consent
YES
request
Pledgors Request
In case of failure Transferring collateral To
Pledgee
Pledgees Request
Request of closing
11
Secured Call Transaction Collateral Management
Secured Call Transactions
  • Secured call transactions are short term money
    lending and borrowing transactions of financial
    institutions collateralized by securities. KSD
    provides collateral management for the
    transactions
  • KSDs service started in October 2003.
  • Players in secured call market
  • Inter-dealer broker brokerage for secured call
    transactions
  • Financial institutions bank, securities firm,
    insurance,
  • investment, fund
  • Settlement bank transferring money
  • KSD matching, settlement, collateral management

12
Secured Call Transaction Collateral Management
  • Principles
  • DVP Call money is transferred against
    establishment or cancellation of pledge(Delivery
    versus Payment). In case of agreement of both
    parties, FOP(Free of Payment) is possible.
  • Settlement of funds should be made through KSD
    account with the settlement bank. (Exception
    FOP)
  • Initial settlement On the trade date KSD
    receives trade details from Inter-dealer broker
    and send the details to each party for
    confirmation. After the confirmation, KSD
    transfers the money and establish pledge on a
    DVP basis.
  • Repayment settlement On the repayment date KSD
    transfers money to lender and cancel the pledge
    on a DVP basis.
  • Extension of lending period is possible before
    the repayment date. In this case KSD receives the
    extension details from the Inter-dealer broker
    and after each partys confirmation KSD settles
    the difference between the trades.

13
Secured Call Transaction Collateral Management
  • Principles
  • Each transaction is secured by its own
    collateral.
  • Lender has no right to decide if he accepts the
    collateral offered by the borrower once the
    collateral falls in the category of collateral
    designated by KSD. However, Lender and borrower
    can agree on collateral pool by securities
    category before the borrower make pledge.
  • Eligible collateral listed stocks, listed bonds,
    CPs, etc.
  • Securities issued by the borrower or difficult
    to evaluate are not eligible.
  • Mark-to-market
  • KSD marks the collateral to market daily by its
    transaction and takes appropriate steps to have
    necessary amount of collateral maintained.
  • The borrower who received margin call should
    offer additional collateral by 230 pm.
  • Only the amount exceeding the necessary amount of
    collateral can be withdrawn.
  • Values of collateralprice of collateralvaluation
    ratioamount

14
Secured Call Transaction Collateral Management
  • Collateral Pool
  • Collateral pool is designated by securities
    category(ex, stock, government bond, financial
    bond, etc.)
  • If collateral pool is not designated by the
    transaction parties, borrower can offer any
    securities among eligible collateral designated
    by KSD.
  • Collateral substitution Borrowers can substitute
    its collateral for another collateral in
    collateral pool. Substitution for collateral
    outside of the collateral pool must be approved
    by the lender.
  • Lender can request replacement of collateral for
    some reasons such as bankruptcy of the collateral
    issuer.
  • Entitlement processing Entitlements from the
    collateral belong to the one designated by the
    parties.

15
Repo Collateral Management
  • Through the tri-party repo settlement system, KSD
    provides deposit of traded securities, settlement
    of trades, and collateral management.

16
Repo Collateral Management
KSD Services
  • KSD Tri-party Repo service started in November
    1999.
  • Players
  • Buyer, Seller securities firm, bank, insurance
    company, etc.
  • Broker Inter-dealer Broker, securities firms
  • Settlement Agent banks
  • Repo eligible securities securities that can be
    marked to market among the followings
  • government bond, municipal bond, corporate bond
  • CP
  • MBS
  • CB, BW are excluded

17
Repo Collateral Management
  • Comparison of Repo Transaction
  • Repo trade parties or Inter-dealer broker enter
    trade details into KSD repo system.
  • KSD compares the details from each participant
    and if they are matched it proceed to settlement
    by preparing settlement details.
  • Settlement
  • KSD checks the sellers account for confirmation
    of necessary amount of securities and if it has
    enough amount, KSD settles the trade by
    transferring securities and money.
  • Settlement is made on a DVP basis. FOP is also
    possible depending on the participants.
  • The computer link between KSD and the central
    bank provide DVP settlement of securities and
    money.
  • In case of FOP, settlement risk is minimized by
    holding the securities until the money transfer
    is confirmed.

18
Repo Collateral Management
  • Mark to market
  • KSD performs daily evaluation of traded
    securities and compares the values with necessary
    amount of collateral and calculate the gap in
    risk.
  • If necessary KSD notifies related party of the
    necessary amount of additional margin.
  • Traded securities can be re-traded for repo or
    sold by the buyer, however margin is not allowed
    for disposal for KSD to keep it as collateral.
  • Any income from the traded securities is paid to
    the seller.
  • Collateral pool is designated by the parties in
    advance.
  • Cash or bond is eligible for collateral.
  • Interests are paid to the cash collateral pledgor
    and income from bond collateral is paid to bond
    collateral pledgor.

19
Collateral Management for Securities Lending
Borrowing
  • KSD functions as intermediary and collateral
    manager for SLB transactions

?Borrow Request
?Lend request
Borrower
Lender
KSD
?collateral
?Trade details
?Trade details
Borrower Account
Lender Account
?Credit
?Debit
1) Request If the request details are matched,
SLB contract is made. 2) Collateral Borrower
offers collateral as cash or securities more than
required amount. 3) Trade detail notification
When the requests are matched KSD notifies the
parties of trade details. 4) Transferring SLB
securities Once the borrower offers enough
collateral KSD transfers loan securities to the
borrower account.
20
Collateral Management for Securities Lending
Borrowing
  • When the securities transferred to the borrower
    account, the ownership of the securities is
    transferred together.
  • Six month expiration, but the lender can always
    recall and the borrower can always pay back
    before the due date. Rollover is also possible.
  • KSD guarantees return of securities on loan when
    the borrower fails to fulfill its obligation.
  • Service started in August 1996.
  • Participants
  • Lender pension, fund, bank, investment company,
    insurance company
  • Borrower securities firms are main borrowers
  • Intermediary KSD
  • Eligible securities
  • Listed stock, listed bond, Exchange Traded Fund

21
Collateral Management for Securities Lending
Borrowing
  • Eligible collateral and valuation
  • KOSPI200 Stock 80 of previous day closing
    price(other listed stock 70)
  • Government bond, municipal bond 100 of price
  • Financial bond/corporate bond above BB rating
    8095 of price according to its rating
  • Exchange Traded Fund 80 of the previous day
    closing price
  • Cash 100
  • Mark-to-market
  • KSD marks collateral to market and check if the
    borrower fulfills its necessary margin.
  • The collateral value shall be over 130 of the
    value of the loan stock and 105 of the value of
    the loan bond respectively.

22
Collateral Management for Securities Lending
Borrowing
  • Income from collateral
  • Cash collateral is managed by KSD and Incomes
    from cash collateral are paid to the provider of
    the cash on a monthly basis.
  • Income from securities collateral is added to
    collateral pool of the borrower.
  • Entitlement processing for securities on loan
  • Principle The borrower shall deliver to the
    lender the same amount of income entitlements
    that the lender would have been entitled to
    (Exception voting right).
  • Rights offering KSD pays subscription money
    received from the lender, if the lender applies
    for subscription by the first day of
    subscription. After listing of the stocks, KSD
    receives the stocks purchased by the borrower and
    deliver them to the lender.
  • Stock dividend KSD collects incomes from the
    borrower within 3 business days from the date of
    listing and delivers to the lender stock
    dividends or bonus stocks.

23
Thank You!
  • Hyun Chul Cho
  • Derivatives Services Team, KSD
  • Email hcjoh_at_ksd.or.kr
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