Clearing, Settlement and Risk Management Functions

Features
Issuer: An entity such as listed company that borrows
the money.

Principal: The par value or the face value of the debt

security payable at maturity.

Coupon rate: The stated annual rate of interest that

the issuer pays on the principal to the holder of the debt security.

Features
Term: The period of time, usually stated in years, over
which the issuer of a debt security has promised to meet its obligations.

Premium Price: When the price of a debt security increases above its face value, it is said to be selling at a premium.
Discount Price: When a debt security sells below its face value, it is said to be selling at a discount.

Features
Accrued Interest: The interest earned by the seller from
holding the bond from the last interest payment date until the disposal date is called Accrued Interest. Determining Accrued Interest: The bonds in secondary market are traded in between coupon payment dates. Therefore, the bond seller must be compensated for the portion of the coupon payment earns for holding the bond since the last payment. The concept will be cleared with the following example:

Features
Example:
On March 1, 2009, ABC Fund sells a corporate bond with a face value of Rs1,000 and a 7% coupon paid semi-annually. The next coupon payment after March 1, 2009, is expected on June 30, 2009. The accrued interest on the bond will be calculated as follows:
The coupon rate will be divided in half, which gives a rate of 3.5% (7% / 2) and coupon payment will then be Rs. 35 (1,000 X 0.035). There are 120 days remaining before the next coupon payment, but because the coupons are paid semi-annually, the regular payment period if the bond is 180 days. The seller, therefore, has accumulated 60 days worth of interest (180-120). Accordingly, the buyer will pay to seller on the settlement date the following: Purchase Price = Rs. 1,000 (Principal outstanding) Interest accrued = Rs. 11.67 Total = Rs 1,011.67

Clearing & Settlement

Admission Requirements
Broker Clearing Members (BCMs) and Non-Broker

Clearing Members (NBCMs) who meet the eligibility criteria may become Debt Market Clearing Members (DMCM) by fulfilling the following requirements: Admission Form Board Resolution (for corporates) Agreement between NCCPL and DMCM Agreement between NCCPL, DMCM and Settling Bank Trust Deed (applicable where trustee has appointed) Security Deposit

Trade Details
All trades executed by BCMs on Bonds Automated Trading

System (BATS) established by the Exchange shall be transmitted to National Clearing & Settlement System (NCSS) for further processing. Debt Market Trades shall be settled through a separate account opened in NCSS on T+1 The BCMs shall be responsible for Clearing and Settlement of trades executed for their clients and proprietary account The trades executed by NBCMs shall be processed through the Institutional Delivery System (IDS) Module established in NCSS

Institutional Delivery System (IDS)

IDS module of NCSS facilitates NBCMs to settle their Debt

Market Trades directly through NCSS. Once a transaction is affirmed by NBCM, the settlement obligation of the initiating BCM is transferred to such affirming Non-Broker CM.
In Exchange, NBCMs may directly be trade through brokers

terminal in the capacity of its Agent. Therefore, in order to automate the entire process, following mechanism will be used for the Auto-Initiation and Auto-Affirmation Process simultaneously:

Institutional Delivery System (IDS)

Auto-Initiation and Auto-Affirmation Process
NBMCs desirous to trade in the Debt Market will be required

to acquire a status of Agent of particular Broker(s) as per the relevant Regulations of the Stock Exchange. The Stock Exchange will provide necessary information of such Agent ship relation of BCMs and NBCMs to NCCPL. BCMs will be required to create a Client Code of such NBCM(s) in NCSS as per the existing Unique Identification Number (UIN) Module

Institutional Delivery System (IDS)

Auto-Initiation and Auto-Affirmation Process
Once Client Code is created by BCM in NCSS and confirmation

from the Stock Exchange received regarding Agent-ship, such UIN(s) of NBCMs will be marked in NCSS for auto-initiation and auto-affirmation.
Upon execution of trade by such NBCMs through the trading

terminal provided by BCM, such executed trade once transmitted in NCSS by the Stock Exchanges shall be auto-initiated and autoaffirmed in NCSS simultaneously.
Such affirmed trades shall be settled by the respective NBCMs

directly with NCCPL

Institutional Delivery System (IDS)

Auto-Initiation and Manual Affirmation Process Whereas NBCMs desirous to trade as a Client of BCM, their respective UINs will not be marked for auto-affirmation, however, such trades will be auto-initiated for manual affirmation by respective NBCMs in NCSS. Initiation Process IDS Transactions shall automatically be initiated by NCSS based on the UINs and available on real time basis to NBCM(s) for affirmation. Affirmation Process Upon affirmation of such Trades, the settlement obligation of the Initiating BCM will be transferred to the affirming Non-Broker CM.

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.

Major Benefits of NCSS

Settlement of non-broker institutions for Regular/Debt Market

Trades directly with NCSS.

Cross Exchange Netting for both cash & securities for CMs who are

members of more than one Stock Exchange.

Settlement of net obligations directly between CMs as per

undisclosed Balance Orders.

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.

Single net settlement for CMs who are members of more than one

Stock Exchange.

Settlement Flow in NCSS

T Buying Broker Selling Broker Execution of Trades at the Stock Exchange (BATS) Online trade feed to NCSS Netting of trades Payment orders and Delivery Receive Money Receive orders and Delivery orders order Delivery of securities (with blocked status) Buying Broker Unblocking of securities on Payment Confirmation SD Collect Payment Payment to NCSS Release Payment
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Generation of IDS Transactions

T SD -1

Selling Broker

Delivery Default Management

CMs who fail to deliver securities till 4:15 PM to be considered as

delivery defaulter.
Failed deliveries are reported to respective Exchange for squaring-

up.
Respective Exchange to square-up failed deliveries by 12:00 AM

next Trading Day.

Buying CMs who have already made the payments will get failed

deliveries by 2:00 PM, on next Trade Day subject to Square-Up.

In case of non-square up such failed delivery shall be closed-out on

SD+1 whereby buyer will get market value on the basis of highest system price i.e. SD-1 to SD+1.

NCSS Pay & Collect

CMs having payable, to pay by 12:00 noon on Settlement Date.

CMs having receivable, to receive by 1:30 PM, provided they

discharged all their delivery obligations.

CMs becoming liable due to short delivery reverses to pay by 4:10

PM.
In case of money default, NCCPL shall apply money default

procedures.
Remaining CMs having to receive payments by 4:30 PM.
Settling Banks to online confirm payments & collections through

NCSS by the Designated Time.

Risk Management for Debt Market Clearing Member

Risk Management
NCCPL shall manage the risk of its BCMs and NBCMs admitted as

DMCMs in respect of Debt market trades executed and / or affirmed IDS transactions.

NBCMs having Agent Ship arrangement with BCMs shall pay margins to

NCCPL directly instead of BCMs.

Where NBCMs trade as a Client of BCMs, in such case, BCMs will have

to pay margins till affirmation of such auto-initiated trades by respective NBCMs.

Once NBCMs affirm auto-initiated trades, the margins will be collected

from such affirming NBCMs.

Exposure and Netting

NCCPL shall determine the Exposure of DMCMs by applying the following netting mechanism:
Netting shall be allowed between buy and sell positions in the same Security on the same day for the same client; Netting shall not be allowed across all the three Stock Exchanges; Netting shall not be allowed between buy and sell positions of different Securities on the same day even for the same client; and Netting shall not be allowed across settlement periods even for the same client NCCPL shall hold such margins till the satisfaction of his settlement obligation on the relevant Settlement Date.

Margin Slabs
Margin requirements shall be calculated on the following rule based margin slabs and collected on post-trade basis:
Description Exposure Margin Par Premium Margin
Total Margin 2.5% of the Exposure amount + 50% amount of the excess market value 2.5% of the Exposure amount + 25% amount of the discounted value 5% of the Exposure amount + 100% amount of the excess market value 5% of the Exposure amount + 25% amount of the discounted value

TFC (having credit rating of A) > par premium TFC (having credit rating of A) < par (discount) TFC (having credit rating below of A) > par premium

2.5% of the Exposure amount 2.5% of the Exposure amount 5% of the Exposure amount

50% amount of the excess market value

25%

100% amount of the excess market value

TFC (having credit rating below of A) < par (discount)

5% of the Exposure amount

25%

Mark-To-Market Losses
NCCPL shall calculate the Mark-To-Market Losses of

DMCMs on the basis of the Closing Price in the Debt market.

Netting shall be permissible across Debt Market Trades in

different Securities for the same client in the same Settlement Date.
NCCPL shall hold such margins till the satisfaction of his

settlement obligation on the relevant Settlement Date.

Mode of Collateral
DMCMs may deposit the following mode of collateral against Exposure Margin and Mark-to-Market Losses:
Cash; Bank guarantees and/or Irrevocable undertakings (where applicable)

Collection of Collateral
NCCPL will calculate Exposure Margins and MTM Losses of BCMs and NBCMs based on their Debt Market Trades on real time basis and collect the demand as per the following Designated Time Schedule (DTS).
NCCPL will generate first demand for the collection of Exposure Margin and MTM Losses tentatively at 11:30 a.m. in the Settling Bank Accounts of respective BCMs

and NBCMs
NCCPL will update the collateral positions of BCMs & NBCMs and generate second demand for the collection of Exposure Margin and MTM Losses (if any) tentatively at 01:30 p.m. in the Settling Bank Accounts of respective BCMs and

NBCMs.
NCCPL will update the collateral positions of BCMs & NBCMs accordingly and generate final demand for the collection of Exposure Margin and MTM Losses (if any) after the close of trading session in the Settling Bank Accounts of respective

BCMs and NBCMs.

Deposit of Collateral as Cash

The role of Settling Banks (SBs) becomes more important when DMCMs opt

to make payment of Collateral in the form of Cash.

NCCPL shall collect Cash against Exposure Margins and MTM demands

through Pay & Collect module of NCSS by providing exclusive automated collection window to the respective Designated Settling Bank branch of the relevant DMCMs designated branches of Settling Banks, as per the DTS by respective DMCMs.

Cash may also be deposited in the Bank account of NCCPL, maintained in the

For the confirmation of Cash deposited by the DMCMs, deposit slip should

have the POSTED stamp over leaf, duly signed by the authorized staff of the Settling Banks.

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Process of Releasing Cash Deposited Against Margins

DMCMs may initiate request (on the prescribed format duly signed by

authorized person) to NCCPL for release of Cash deposited against Exposure Margins & MTM losses.

Upon receipt of release request, NCCPL shall validate the current Collateral of

such DMCM against Exposure Margins & MTM losses.

In case of excessive Collateral: NCCPL shall release cash on the same settlement date by issuing the cheque in the name of DMCM. In case of deficiency in the required Collateral: NCCPL shall reject the release request of cash. Such rejected request shall not be re-processed and DMCMs shall submit new release request, if required.

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Prescribed Format for Releasing Cash Deposited Against Margins

(To be typed on letterhead of DMCM)

The Head of Operations National Clearing Company of Pakistan Limited 8th Floor, Karachi Stock Exchange Building Karachi Stock Exchange Road, Karachi.
Subject: Release of Cash Deposited Against Exposure Margin and MTM Losses

Dear Sir, You are requested to release Rs.____________ deposited against Exposure Margins and MTM Losses by (Name of DMCM) holding CM Id _________. Regards, __________________ Authorized signatory(ies) Name
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Deposit of Collateral as Bank Guarantee

DMCM may also deposit Bank Guarantee as Collateral, on the NCCPLs

prescribed format.

DMCM shall notify NCCPL fifteen Business Days prior to the expiry of the

submitted Bank Guarantee.

Bank Guarantee submitted by DMCM shall be retained by NCCPL till its

expiry date. However, DMCM may withdraw their Bank Guarantee before the expiry date by giving seven Business Days prior notice to the Company.
In case of withdrawal of Bank Guarantee, DMCM should make necessary

arrangements for the provision of other means of Collaterals.

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Deposit of Collateral as Irrevocable Undertaking

DMCMs may also deposit Irrevocable Undertaking as Collateral, on the NCCPLs

prescribed format.

Irrevocable Undertaking is only applicable for Commercial Banks/Development

Financial Institutions (DFIs) having credit rating of AA and higher.

Upon receipt of Irrevocable Undertaking, the Company shall make deposit entry,

to the extent of amount of Irrevocable Undertaking in the respective DMCMs account in the system.

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Process of Releasing Irrevocable Undertaking Deposited Against Margins

The DMCM may withdraw their Irrevocable Undertaking by giving seven

Business Days prior notice to NCCPL.

In case of withdrawal of Irrevocable Undertaking, the DMCM should make

necessary arrangements for the provision of other means of Collateral.

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Risk Management Related Reports on NCSS

Following are the Reports and Downloads that will be available to DMCMs on NCSS:

Reports

Exposure Brief Report Exposure Summary Report Demand of Payment Report System Price Report Participant Collateral Position Report Capital Adequacy Report

Download:

Download RMS Exposure Brief Report Download RMS System Price Report
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Exposure Brief Report

Following information's will be available to DMCMs in Exposure Brief Report on trade to trade basis:

Exchange ID Symbol Exposure Date Client Buy/Sell Quantity Buy/Sell Amount Excess/Below Par Value Loss/Profit Exposure Exposure Demand
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Exposure Summary Report

Following information's will be available to DMCMs in Exposure Summary Report:

Exchange ID Symbol Exposure Date Market Type Exposure Exposure Demand Loss Demand Total Demand

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Demand Payment Report

Following information's will be available to DMCMs in Exposure Demand Summary Report:

Net Outstanding Purchase/Sale Value Total Exposure Exposure Demand Mark to Market Losses Demand Total Demand Already Deposited Collateral Net Payable

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Participant Collateral Position Report

Following information's will be available to DMCMs in Participant Collateral Position Report:

CM ID Name Bank Collateral Type Amount

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System Price Report

Following information's will be available to DMCMs in System Price Report:

Symbol Name Face Value Previous Day Closing Price Last Traded Price Calculated Price High/Low/Average/System Price

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Capital Adequacy Report

Following information's will be available to BCMs admitted as DMCMs in Capital Adequacy Report:

CM ID/Name Trader ID/Location Exposure Net Capital Balance Position Limit Balance

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NCSS Operating Screens

LOGIN INTO NCSS

MAIN MENU SCREEN

User Change Password

Change Password

Menu for Affirmation/Rejection

IDS CONFIRMATION SEARCH SCREEN

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IDS CONFIRMATION SAVE MODE SCREEN

46

IDS CONFIRMATION GO SAVE MODE SCREEN

47

IDS CONFIRMATION GO POST MODE SCREEN

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Non-Exchange Report

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Download for NE Transactions

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BALANCE ORDER BOOK ENTRY DELIVERY SCREEN

Reports Trades

Reports Balance Order

Thank You !
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED

8th Floor, Karachi Stock Exchange Building,

Stock Exchange Road, Karachi 74000 Pakistan
TEL : (92-21) 3246 0820-23 FAX: (92-21) 3246 0827 E-Mail : info@nccpl.com.pk Website : http://www.nccpl.com.pk