The National Depository for Securities (KDPW S.A.) has established the company KDPW_CLEARPOOL which will act as transaction settlement guarantor. It is the first step in the spin-off from KDPW’s organisation of a clearing house according to the globally applied central counterparty model (CCP). The guarantor will be in a position to use its capital to guarantee the settlement of transactions.
The new entity KDPW_CLEARPOOL has been equipped with important features of the future central counterparty in compliance with the highest international standards:- legal entity separate from KDPW (central depository);
- own capital which can be used to guarantee the settlement of transactions;
- capped additional contributions of market participants to the guarantee fund.
Separate legal entity
The guarantor’s is a separate legal entity, ensuring that the future CCP will operate in compliance with international standards of clearing houses. Due to the different risks of CCP clearing house services and risks of the core business of the central securities depository (CSD), the standards require that a separate legal entity provide CCP services.
Guaranteeing the settlement of transactions
The settlement guarantor and future CPP will be in a position to use its capital to guarantee the settlement of transactions, which reinforces the safety of settlement. The National Depository will contribute PLN 60 million of capital to KDPW_CLEARPOOL. The capital can be used in critical cases after the core resources of the guarantee system have been exhausted to pay the liabilities of an insolvent participant under transactions covered by the guarantee fund.
Capped additional contributions of market participants to the guarantee fund
Even before the CCP is established, the settlement guarantor will ensure an function of the KDPW settlement guarantee system of key importance to the participants: a cap of their additional contributions to the settlement fund. The cap is set at 110 percent of the participant’s basic contribution. The cap will allow the participants to assess the risks of participation in the settlement guarantee system. Currently the risk is difficult to assess because participants’ additional contributions to the guarantee fund are not capped.
Benefits of the settlement guarantee function:
- The guarantor is the first step in creating a CCP; it accelerates access to CCP functions and solutions for the market.
- The settlement guarantor will cap the participants’ additional contributions to the transaction settlement guarantee fund to the benefit of the participants.
- The implementation of the function will reduce in practice the amount of clearing members’ additional contributions to the guarantee fund by creating new resources (other than participants’ assets) used to guarantee the settlement of transactions.
- The model does not require major amendment to KDPW regulations (including development and approval of rules of a CCP clearing house) and can be rolled out within a short time horizon.
- The guarantor may improve the perception of KDPW by Polish and foreign market participants. It will send a signal to foreign investors that the Polish settlement guarantee system is evolving.
Towards a CCP
The implementation of a settlement risk management system based on SPAN methodology within KDPW’s new guarantee model will open the door to creation of a CCP clearing house – an entity liable to participants for the settlement of cleared transactions. As a result, margins will be used as the main instrument to guarantee the settlement of transactions on the cash market (similar to the existing guarantees on the futures market).
KDPW is planning to achieve full CCP functionality according to the following timetable:- Create a settlement guarantor – Q2 2010.
- Create a CCP clearing house equipped with a SPAN risk management system – Q1 2011.
- Implement securities netting functionalities in the CCP clearing house – Q4 2011.