Budapest Stock Exchange Clearing & Settlement in KELER

Tamás Madlena

Director Marketing & Customer Relations 11 February 2004, London – Citibank Client Forum

KELER Profile

• Acts as the Central Securities Depository, considered to be the National CSD of Hungary.

• Being a specialized financial institution ensures the full administration, clearing and settlement of spot and derivatives transactions – as a central counterparty – concluded on the organised markets of the Budapest Stock Exchange and the Budapest Commodity Exchange.

• Provides RTGS DVP & FOP for the OTC market

BSE net clearing & settlement - 1

Account structure

Securities accounts: Cash accounts:

All clearing members must have securities accounts within KELER. Participants can open a main account and within that, unlimited number of sub-accounts. These sub-accounts must be marked as “client” or house” accounts and some of them are dedicated to various purposes (one is for the settlement of stock exchange trades).

The cash leg of a transaction is settled in HUF 1) within KELER, in case of brokerage companies who are authorized to hold their cash accounts within KELER or 2) at the Central Bank, in case of participants having banking license.

BSE net clearing & settlement - 2

Settlement process

1.

2.

3.

BIS model 3, net securities/net cash

Stock Exchange trades are settled on a multilateral net basis. The settlement cycle for equities is T+3 while for debt instruments (including government debt) is T+2. The settlement takes place between 8.15-9.30 a.m. on each Settlement Day.

The settlement flow starts from the Budapest Stock Exchange sending the list of matched trades to KELER. The Clearing House calculates the net positions by clearing member for each securities and cash, and reports it accordingly.

The collateral checking takes place at 08:45 a.m. - before the spot settlement.

The trading period starts on BSE at 9:00 a.m. The multinet settlement is executed at 09:30 a.m.

BSE net clearing & settlement - 3

Collateral handling

Type of securities

Hungarian government securities, bonds issued by National Bank Fixed income of Hungary, Mortgage bonds Corporate Bonds Shares < 1 year 1 - 3 years > 3 years

Price used for evaluation Haircut

Price calculated from 2% reference yield of Gov. 3% Debt Management Agency 4% Other < 1 year Fixed income 1 - 3 years > 3 years Individually defined prices according to market value Last Stock Exchange Changing income Egis, Matáv, Mol, OTP, Richter Other BUX shares closing price 2% 15% 17% 19% 15% 15% 20%

CCP Guarantee System

(i) Individual Member Funds

Initial Financial Collateral Initial Margin calculated by SPAN4RM® Variation Margin Additional Financial Collateral (ii) Collective Guarantee Funds (CGF) (iii) KELER Share Capital and Reserves

Non-performances

- cash If a default occurs on cash side:

1. KELER withdraws the amount needed from the Individual guarantee of the participant, in the following order: 1- client’s own cash, 2- client’s own securities, 3- Collective GF 2. If that is not enough, or if the above listed collaterals were in government debts or other securities, then KELER is trying to sell the instruments, while the Collective Guarantee Fund will be used to ensure full settlement on the market as soon as possible. 3. In the unlikely event of its insufficiency, KELER uses its own capital to cover losses.

Non-performances

- securities If a default occurs on securities side:

1. An automatic securities lending procedure starts.

2. If lending is not successful, the non-performed trade will be taken out from netting and 3. will be settled on a gross basis, KELER becoming the principal to the counterparties.

4. If the participant meets the requirements for providing extra collateral, then the performance can be postponed until SD+2.

5. In case of final non-performance a forced buy-in procedure will be executed by KELER.

6. In case the securities cannot be purchased on the market, the seller will be satisfied in cash.

Settlement is final and irrevocable.

Clearing Membership

- levels KELER operates a multilevel clearing membership structure

1.

2.

3.

General clearing members (GCM) are entitled for direct clearing and settlement services of KELER. Under contractual agreements they may clear their own and clients’ trades and those of non-clearing members.

Individual clearing members (ICM) may clear their own trades only.

Non-clearing members (NCM) posses trading rights from Exchanges only. They must enter into a contractual agreement with a GCM.

Clearing Membership

- criteria Financial and other criteria for clearing members include:

· · Membership of an Exchange Equity must be equal or higher than that specified by KELER.

- go to -

· · Position accounts, variation (settlement) cash and initial margin cash and securities collateral accounts with KELER Lodgment of adequate level of collateral for IFC · Contribution to CGF Clearing members must contribute to the CGF with an amount calculated T+2: 3% of the average volume of open positions in the previous 4 weeks T+3: 2,5% of the average turnover of the previous 10 weeks (T+3) The minimum aggregated (‘T+2’ + ‘T+3’) amount is 1 M HUF, the maximum is 125 M HUF.

· Members must orderly meet variation-, initial margin, CGF and IFC calls of KELER on time and must ensure adequate balance on their accounts with KELER

Remote membership

Remote members on Budapest Stock Exchange may choose any of previously described Clearing Membership status. 1.

Remote member as General Clearing Member or Individual Clearing Member: in this case the the remote member will be direct account holder and clearing member at KELER with all rights and obligations. Currently all corresponding rules and regulation (contracts, conditions) are available in Hungarian only. For communication KELER’s proprietary system (KID) must also be used in Hungarian via leased lines.

2.

Remote member as Non-Clearing Member: must enter into a contractual agreement with a General Clearing Member. A non-clearing member has no

contractual relationship with KELER.

Communication in the near future

• Subject to client needs (existing and potential) • KID in English • Standard SWIFT

– Different stages – Settlement instructions / confirmations / account reporting – Corporate actions

Enhancement of OTC - DVP

• Towards an even better STP rate • Pre-matching (starting SD-7) • Alleged transactions (5 days) • Tolerance limit (buyer /HUF 10,000) • Using the clients’ reference number during the whole lifecycle • Narrative- beneficial info

[email protected]

www.keler.hu

(new website in May 2004)

Capital requirements for KELER clearing members

BSE Spot trading

Individual clearing member – if clearing is provided only to non-clearing members Individual clearing member – if clearing is provided in own name and to non-clearing members General clearing member In million EUR T+3 T+2 0,075 0,075 0,37 1,89 0,37 1,89