Clearing / Settlement
Development of System
Clearing and settlement infrastructure
Clearing is mainly considered to reduce members’ settlement burdens that arise through netting actions. However, the clearing house (CCP) provides more functions from a market perspective. In other words, if market participants’ credit risks are not homogenized through the clearing house (CCP), then multilateral and continuous transactions in the market become impossible. Moreover, if the anonymity of the other transaction party is not guaranteed through the clearing house (CCP), then the market becomes stratified or liquidity is not improved. Above all, if conviction and trust that ‘the CCP is the opposing transaction party and settlements are completed through the CCP’ are not instilled in market participants, then transactions cannot be realized either. Traditionally, the KRX has directly administered clearing functions. Recently, there have been tendencies for the KRX to separate these tasks, but even in these situations, the KRX fundamentally operates the CCP in the most part in the form of a subsidiary. This is due to the close systematic relationship between transaction and clearing functions. Therefore, Korea’s market infrastructure must be built so that the close relationship between transaction concluding functions and clearing functions can be preserved.
Internationally, in order to prevent system risk in financial markets, the clearing house (CCP) that focuses on credit risk and securities depository (CSD) that stores and manages national assets are generally operated separately. Recommendations from international organizations such as BIS, ESCB (European System of Central Banks)-CESR (Committee of European Securities Regulators), European Parliament resolutions, Reserve Bank of Australia’s guidelines for financial stability, etc. also suggest the separation of the clearing house (CCP) and securities depository (CSD).
Introduction of an advanced risk management system
Despite the fact that settlement must take place between the KRX (transaction party) and members in order to clarify transaction relationships, current practices are not all being operated in this way. In other words, parts of the settlement process are being exposed to settlement risk; therefore, these mistaken settlement practices must be corrected. Moreover, in order for the complete establishment of DVP, settlements should be concluded in the clearing house accounts so that the clearing house can manage the settlements of securities and charges.
In addition, settlement charges paid through commercial banks are partly insufficient from a same day capitalization perspective. Therefore, the system must be reformed so that settlements can take place through the central bank and at the same time settlement finality must be attained.
Furthermore, our market has adopted daily net settlement (DNS), which does not recognize the carrying over of failed securities on the settlement day. However, major developed countries have introduced continuous net settlement (CNS), which recognizes the carrying over of failed securities, in order to promote the facilitation of securities settlements.
Meanwhile, the KRX has joined the CCP12, an international clearing organization, in order to learn from advanced systems through exchanges with foreign clearing institutions. The CCP12 was inaugurated in January of 2001 for the purpose of exchanging information among clearing institutions from various nations. As of January, 2006, 21 clearing institutions were members of the CCP12 and in December of 2004, the KRX hosted the 7th CCP12 Meeting in Seoul.
- Contents Manager :
- Derivatives Market Division/Clearing & Settlement Rules & Regulations/LEE JUNG HYUN(051-662-2825)
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