Download - K ARACHI S TOCK E XCHANGE Risk Management Haroon Askari Deputy Managing Director Karachi Stock Exchange Limited December 14, 2015.

KARACHI STOCK EXCHANGE Risk Management

www.kse.com.pk

Haroon Askari Deputy Managing DirectorKarachi Stock Exchange Limited

December 14, 2015

MARKETS

• READY MARKET

• DELIVERABLE FUTURES CONTRACT MARKET (DFC)

• CASH SETTLED FUTURES MARKET (CSF)

• STOCK INDEX FUTURES MARKET (SIFC)

• PROVISIONAL MARKET (IPO)

01K ARACH I S TOCK E XCH AN GE

RISK MANGEMENT COMPONENTS / TIERS

• BASE MINIMUM CAPITAL

• MONITORING & MAINTENANCE OF CAPITAL ADEQUACY REQUIREMENT

• CIRCUIT BREAKER LIMITS

• MONITORING OF POSITION LIMITS

• EXPOSURE MARGINS & MTM LOSSES MANAGEMENT

• COLLETERAL MANAGEMENT

• CLEARING HOUSE AND INVESTOR PROTECTION FUND (CHPF) & (IPF)

• VALUE ADDED FACILITIES/APPLICATIONS


THE ROLE OF BASE MINIMUM CAPITAL (BMC)


Base Minimum Capital is the collateral deposited and maintained by every TRE Certificate Holder for its eligibility to trade through the Exchange Trading Systems

Failure by a Broker to maintain Base Minimum Capital or submit the related prescribed documents within the specified time is considered a violation of Regulation 19.3.1 of KSE Rule Book

Base Minimum Capital (BMC)

Brokers’ access to Exchange

Trading Systems

Investor Protection against default of Brokers

Effective Risk Management by the Exchange

DETERMINATION OF REQUIRED BMC


*Assets Under Custody (in PKR)Required

BMC (in PKR)From To

0 50,000,000 16,000,00050,000,000 250,000,000 17,000,000

250,000,000 500,000,000 19,000,000

500,000,000 1000,000,000 21,000,000

1000,000,000 2,500,000,000 23,000,000

2,500,000,000 5,000,000,000 26,000,0005,000,000,000 10,000,000,000 28,000,000

10,000,000,000 and above 31,000,000

*AUC is same as Custody Position as defined in CDC Regulations i.e. the cumulative value of total number of Securities held under the custody of a Broker under its Participant ID in CDC.

COLLATERAL FOR BMC


S.# Eligible Collateral for BMC 1 Notional Value of Transferable TRE Certificate = 5.0 Million

2Shares of surviving entities of LSE and/or ISE, maximum up to 100% of shares allotted to an initial shareholder of respective entity, after applying 30% haircut on their breakup values.

3Shares of the Exchange, maximum up to 40% allotted to an Initial Shareholder of the Exchange without haircut

4

60% Blocked KSE Shares = Considered only when combined value of collaterals maintained in the form of TRE Certificate and 40% Shares of the Exchange, partially or fully is insufficient to meet the required BMC.

5 Cash 6 Bank Guarantee

7 Margin Eligible Securities

8

Bank Guarantee provided by the Trustees of the Funds (Additional BMC Collateral for TREC Holders of LSE/ISE). Only when combined value of collaterals maintained in the form of TRE certificate and shares of the surviving entities of LSE/ISE (partially or fully) is insufficient to meet the required BMC.

Maximum - LSE = 5.0 Million and ISE = 1.0 million

VALUATION OF COLLATERAL FOR BMC


Proposed

Review & Updation of BMC

Monthly

Time period to fulfill the shortfall in updated BMC

Within 5 working days notice from the last working day of the month

Valuation of BMC Collateral (Interim Review)

Time period to fulfill the shortfall in Collateral

Within 1 working day starting from opening of market.

Margin Eligible Securities daily

Transferable TRE Certificate Semi annually

Shares of the Exchange Semi annually

Shares of the surviving entities of LSE/ISE

Semi annually

Legal Documents Required


Original Trading Rights Entitlement (TRE) Certificate

Letter of Hypothecation, Lien and Authority for TRE Certificate

Letter of Pledge, Lien and Authority for KSE/LSE/ISE Shares

Certified copy of the Board resolution authorizing officials of

TRE Certificate Holder with list of signatories and their

specimen signatures

What happens if the deposited collateral falls short of the required BMC?


Semiannual Revaluation of KSE

and Surviving Entity of ISE/LSE shares

Daily valuation of MES at Day End

BMC > Deposits = Notice to TREC

Due Date 1 working day

Deposits For KSE TRECBMC > 40% KSE Shares +

Transferable TREC = 60% KSE Shares and or Cash/BG

Deposits For LSE/ISE TREC100% Surviving entity LSE/ISE Shares +

Transferable TREC + MES + Cash/BG

Deposit FailureUtilization of Exposure

Margins after Market Hours on Due Date

Deposit FailureSuspension of Trading terminals at

Close of Business Hours

• CAR is the first level RMS tier which is used to determine the overall trading capacity of a TREC Holder in terms of Exposure. (Schedule –II of Chapter 19)– Regular Market Exposure Limit = 25 Times of NCB

– Futures Market Exposure = 7.5 times of NCB

– MTS and Futures Markets Exposure = 7.5 times of NCB

– All Markets aggregated Exposure = 25 times

• Minimum Net Capital Balance (NCB)requirement is Rs. 2.5 million.

• TREC Holders are required to submit their duly audited /verified Certificate of NCB twice a year for June 30th and December 31st.

• NCB can only be issued from last Statutory Auditor of Brokerage House which could be selected from category A or B of SBP’s Panel of Auditors

• Deadlines – March 15 for NCB as on December 31 and September 15 for NCB as on June 30.

• A penalty framework has been implemented on non- compliant Brokerage Houses as per Schedule VI of Chapter 19 of KSE Rule Book

CAPITAL ADEQUACY REQUIREMENTS (CAR)


• There are security-wise circuit breakers for each Market separately in case of price fluctuation of 5% or Re. 1/-, whichever is higher from the Closing Price of the previous day.

• Trading will be allowed up to the upper and lower limits as set by the circuit breakers. No trade in the respective security will be allowed beyond the above price fluctuation.

• Circuit Breakers will soon be replaced with Market Halts.

CIRCUIT BREAKER LIMITS


POSITION LIMITS (Schedule –V)

Position Limits Deliverable Futures

Contracts (Cumulative position limits based on the

total open interest in a

security across all

derivatives contracts)

Cash Settled Futures Contract

(Cumulative position limits based on the total open interest in a

security across all derivatives

contracts)

Stock Index Futures Contract

based on per product (KSE-30/

each sector index)

Ready Market

Contracts.(Position

limit will be based on the volume

in a security

)

Market wide 40% of free float for each security

40% of free float for each security

Not applicable 100% of free float

Member wide (member’s position includes its clients’ positions)

10% of Market wide limit


10% of total Open Interest or 10000 contract (whichever is higher)

No limit

Client wide 5% of Market wide limit


1% of total Open Interest or 1000 contract (whichever is higher)

No limit 11K ARACH I S TOCK E XCH AN GE

• VaR based Exposure Margins & Mark-to-Market losses are collected from TREC Holders as per Client Level Margining Regime

• Our VaR margins quantify maximum of next FIVE days worst case scenario, wherein the VaR is scaled-up for the illiquid securities. (19.5.2 (a) of KSE Rule Book)

• All trades are subject to pre-trade margins, trading of a TREC Holder is automatically halted as soon as the margins fall below the required level.

• Mark-to-market (MTM) treats all credit contracts under the assumption that a credit loss can arise over time, deteriorating the asset’s credit quality before the end of the planned time horizon.

• Concentration Margins (Schedule-VII) are applicable on Cash Settled & Deliverable Futures Contract Markets and Liquidity Margins (Schedule-VIII) are applicable in Ready Market

• Following netting regime is applied to all trades:

– not allowed across settlement periods and across clients.– Netting in Exposure and MTM losses is implemented on UIN basis.– Netting is allowed between buy and sell positions in the same scrip for the same

settlement period for the same client.– Netting is allowed in MTM losses in different securities for the same settlement

period for the same client.

EXPOSURE & MTM LOSSES MANAGEMENT SYSTEM


• An effective, efficient and self deterrent risk mitigating Margining Regime introduced on Pre-Trade basis on April 5, 2010.

• Margining regime shifted from Broker level to Client/UIN level where trading exposures capacity aligned either with the margins available from client’s Sub-account or House Account Cash deposits/Bank Guarantee deposited with the Exchange.

• The margins deposited from the sub-account of one UIN is not utilized to cover the margin requirements of other UIN, any excess deposits from client’s UIN sub-account is valued at zero and is not utilized for other UINs’ margins requirements.

• All TREC Holders have an option to allocate margins from the deposits/collaterals available in their respective CDS House Account or Cash/Bank Guarantee deposited with the Exchange to meet the client/UIN level margin obligations against the respective trading Exposure.

CORE APPROACH;• Risk mitigation towards unfair trade practices in terms of Clients’ Assets usage• Segregation of Client Securities at trade level• Rehabilitation of Investors trust in the systems and working of Capital Markets

CLIENT LEVEL MARGINING REGIME


• Exposure is calculated at the higher of the values determined either by summing-up of all Settlement Day Wise net outstanding buy positions or all net outstanding sale positions for the same client.

CORE BENFITS

• Liquidity ease at KSE Broker level

• Enhanced trading capacity

• Cost effectiveness of doing across settlement squared-up trading approach

CROSS SETTLEMENT EXPOSURE


CONCENTRATION MARGINS

• Effective and focused Concentration Margins regime designed and implemented in DFC and CSFC which are focused only on concentrated positions

CORE APPROACH• An efficient and focused deterrent to manipulative trading concentration in

leverage market

• Three tier dimension i.e, Market, Broker and UIN level

• Two technical parameters i.e., Exposure/Open interest and Free Float



CONCENTRATION MARGIN SLABS%AGE OF DFC/CSF POSITION TO TOTAL DFC/CSF POSITION

AND %AGE OF DFC/CSF POSITION TO FREE FLOAT OF SCRIP

Concentration Margins

MARKET-WIDE SECURITY CONCENTRATION SLABS AND RATES Greater than 2 " Greater than 5.00 1.00

Greater than 6 " Greater than 7.50 2.00





BROKER-WIDE SECURITY CONCENTRATION SLABS AND RATESGreater than 5 " Greater than 1.00 1.00






UIN-WIDE SECURITY CONCENTRATION SLABS AND RATESGreater than 1 " Greater than 0.50 0.50







LIQUIDITY MARGINS

• Effective and focused Liquidity Margins regime designed and implemented to cater the liquidity risk and default of large positions in Regular Market.

CORE APPROACH• An efficient and focused deterrent to manipulative/over limit trading

• No margins required if exposure is up to Rs.50 million

• Payable from Proprietary Account in the form of Cash and/or Margin Eligible Securities and/or Bank Guarantee

LIQUIDITY MARGINS


LIQUIDITY MARGIN SLABExposure Value as per New Regime

Liquidity Margins %From To

0 Rs. 50 million No

Above Rs. 50 million Rs. 100 million 0.50%








Above Rs. 450 million 9.25%

LIQUIDITY MARGINS


• Margins are collected from TREC Holders based on Client Level Margining Regime

• VaR based Haircut is applicable for the valuation of Securities deposited against Exposure Margins & Mark-to-Market losses.

• Securities eligible for collateral purpose selected on the basis of lowest Impact cost and Highest daily average turnover. Eligible securities are subject to the review of every six month

• Units of Money Market CDC eligible Open End Mutual Funds are accepted against margin requirements

• Maximum acceptable limit of securities for collateral is based on its VaR and Free Float. (Schedule-IV of Chapter 19 of KSE Rule Book)

• Bank Guarantees and T-Bills are also acceptable against Margin Requirements

COLLATERAL MANAGEMENT


RISK MANGEMENT – A VALUE ADDED APPROACH

• Net sold deliveries can be deposited on T+0 basis to drop out the related Exposures, MtM losses and margin requirements thereon

• For DFC market, a memorandum of loss is maintained which is collected at the close of the contract.

CORE BENFITS

• Liquidity ease

• Cost effectiveness

• Enhanced Trading and Arbitrage capacity

PRE-SETTLEMENT DELIVERY


• An automated system has been designed to enhance the efficiency and effectiveness in the process of Securities & Cash Margin deposits and Release

CORE BENFITS

• Fast processing of release of related funds

• Operational efficiency

• Better fund management

• Cost effectiveness because of automated module

ELECTRONIC PLEDGE/DEPOSIT & RELEASE REQUEST


PLEDGE AND RELEASE OF SECURITIES


• Securities could be pledged with the Exchange through CDS in relevant markets Group Pledge IDs issued to Brokers by the Exchange

• Release of shares could be done through following process

RMS - Release Form

System Checks Broker Level

Demand

System Checks UIN Level Demand

Request sent to Exchange

Intimation to User R

EJECTED

ACCEPTED

DEPOSIT & RELEASE OF CASH MARGINS


• Semi-auto process • Fully automated system called Cash Management System

Semi Auto Process for Deposit and Release Cash Margins

Broker visits

Designated Bank Branch

Transfer/Deposit funds in

KSE account

Submit Deposit

Slip stamped

as POSTED

to Exchang

e

Exchange Enters Deposit

Slip/Cheque

Amount in RMS

RMS and KATS

updated

Checking /

Verification

Access Release form and Selects a

Bank

System Shows Excess Cash

Margins

Enters Amount

for Release

System compares release amount

with access release

Notification to

Broker for Acceptan

ce / Rejection

of Release

• Used for auto deposit and release of Cash Margins for all Markets of the Exchange.

• Brokerage house(s) will process Cash Collateral Deposit, Release and Transfer requests through their NCHS terminals and same request details will be on-line available to respective banks for their necessary action

• On the basis of bank’s actions the margin system of the Exchange will be updated.

• Tripartite agreement between respective Banks, respective Brokerage Houses and the Exchange, which covers at least the following aspects:

The Exchange and Brokerage houses will be required to unconditionally and irrevocably authorize Settling Banks to Debit or Credit their Bank Accounts with the amount reported on Cash Collateral Management System

Cash Collateral Deposit & Release Reports shall be in electronic form and shall not bear the signature

In case of insufficient funds in the Broker’s Bank Account, Settling Bank will Debit Bank Account to the extent of available balance

CASH MANAGEMENT SYSTEM (CMS)


• Bank Account(s) designated for Brokerage House and CLIENTS. • Cash margins deposited from Bank Account(s) marked as “Clients Account”

shall not be utilized for Brokerage House margin requirements. • Upload or Client Selection Methodology - deposit/release request• Aggregated sum only to Bank - No Clients information • CMS will update margins of clients as per intimation of Bank(s)

CASH MANAGEMENT SYSTEM (CMS)


Process Flow – Deposit of Funds through CMS


Tripartite Agreement

Access Cash Management

System (CMS)

Select/Upload Required Fields

•Bank•Market•Segment•Bank & Account Type•Client Code/UIN

Request Forwarded to Bank

Bank Check:•Available Cash•Transfer Payment

AcceptedRejected

Margins of respective Clients in RMS updated as

per deposit request

Deposit of Funds through CMS




System (CMS)

Select/Upload Required Fields

•Bank•Market•Segment•Client Code/UIN

RMS Checks:•Available Cash•Margin Required

AcceptedRejected

Margins of respective Clients in RMS Reduced as per Release request

Bank Check:•Available Cash•Transfer Payment

Rejected

Accepted

Funds Transferred

En

try

Re

ve

rse

d

Process Flow – Release of Funds through CMS


Release of Funds through CMS




System (CMS)

Select/Upload Required Fields•Market (From – To)•Segment (From – To)•Bank and Account Type•Client Code/UIN

RMS Checks:•Available Cash•Margin Required

Accepted

Rejected

Margins of respective Clients in RMS updated as

per Transfer request

TRANSFER OF FUNDS BETWEEN MARKETS


ACCESS / AUTHORITY TO CMS USERS

• Authorities for Save, Post and Cancel to different Users could be provided through Security option

• Adminitrative All sort of access/authorities can only be given by the Administrator.• To provide any access to a particular user, following process will be followed.

o Administrator/Super User will select the desired user in the User Tabo Select the required Authority from the list available on the left side of the formo The Administrator will select the “Yes” option and save the action to provide the

required authority to the selected user.


• The exposure of the settlement day is dropped of those members who have fulfilled their settlement obligations at NCCPL. This facility is available after 30 minutes each day

CORE BENFITS• Liquidity ease on real time basis

• Enhanced trading capacity on real time basis

• Cost effectiveness

• Efficient and effective fund management

EXPOSURE DROP-OUT


• As per Clause No.19.8.5 of Chapter 19 of KSE Rule Book, Directors and Chief Executive Officer of Brokerage House irrespective of their holding in the Brokerage House or any Individual who holds at-least 10% shares of corporate Brokerage House may authorize Brokerage House to utilize their collateral lying in related sub-account against margin requirement of Brokerage House.

• An authority from Pledgor on non-judicial stamp paper shall be required as per Schedule-IX of Chapter 19 of KSE Rule Book.

CORE BENFITS

• Enhanced trading capacity in the context of Client level margin regime

• Enhanced trading business capacity

• Cost effectiveness of doing business

OTHER SOURCES FOR UTILIZATION OF MARGINS


• An automated module/session is provided after the close of trading hours to the members for corrections / rectifications and split of quantities may be executed in shape of a reversal trade

• These traded to be treated as explicit Cross Trades• Commission (LAGA) is charged for rectified trades

CORE BENFITS

• Automated hassle free process to rectify the errors in UIN, split of trade and client codes

• Availability of record for Audit/inquiry/investigation purposes with respect to Trade Modification

TRADE MODIFICATION/RECTIFICATION


• UIN Net Demand Report – UIN wise aggregated exposure without symbol o UIN Exposure o Exposure Margins o MtM Losses o Liquidity/Concentration Margins o Total Marginso Deposits Against Margin requirementso Excess Margins

• Pledge by UIN – UIN and Symbol Wise pledge position. o UIN and Sub-accounto Symbol, Pledged Quantity and Value o Accepted pledged Quantity and Value

• Payment Order – Obligation of Brokerage House to make payment to Exchange• DFC/CSFC Payment Order for Loss – Payment needs to be made to NCCPL against MtM

Losses in DFC and CSFC on T+0 basis. • Exposure Margin Notice – Payment needs to be deposited with Exchange against

Exposure Margins, Liquidity/concentration Margins, MtM of Ready Market not later than opening of market on next trading day.

• Ready Market Brief – Detail of trades executed by a all UINS • DFC Market Brief – Detail of trades executed by a all UINS • Deposit and Release Reports

IMPORTANT REPORTS


THANK YOU

Serving Investors & IndustryStock Exchange Building, Stock Exchange Road, Karachi-74000,

Pakistan. Tel: 111-001-122 Website: www.kse.com.pk