MICEX FoREIGN EXCHANGE MARKET

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1 TABLE OF CONTENTS BENEFITS FOR CLIENTS 2 MAIN INNOVATIONS 4 limits and coverage 6 RISK PaRAMETERS 10 MARGIN REQUIREMENTS 14 SETTLEMENT OF UNFULFILLED OBLIGATIONS 16 TRADING AND SETTLEMENTS SCHEDULE 18 MICEX FoREIGN EXCHANGE MARKET

2 BENEFITS FOR CLIENTS The new risk management system gives participants in the UTS the following benefits: Reduced costs Flexible use of coverage Additional possibilities to close positions Optimization of payments Simplified risk assessment THE POSSIBILITY TO TEST THE NEW RMS BEFORE THE LAUNCH OF THE PROJECT 2

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4 MAIN INNOVATIONS trades are made on the terms of partial coverage for currency pairs USD/RUB, EUR/RUB and USD/EUR; exchange rate risks are evaluated jointly for trades with partial coverage; combined limit is calculated to control market risks for all trades with partial coverage; the Risk Fund covers currency pairs EUR/RUB and USD/EUR; rubles, Euros and US dollars are used as coverage in any combination; coverage is assessed in rubles, considering discounting coefficients for each currency; for currency pairs KZT/RUB, UAH/RUB, BYR/RUB and CNY/RUB trades are made on the terms of full coverage with TOD settlement date; one net obligation or net claim in each currency; single exchange certificate for all trades made with partial and full coverage. SINGLE EXCHANGE CERTIFICATE 4

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6 LIMITS AND COVERAGE A combined limit is accepted to control market risks for all trades with partial coverage. It is recalculated each time a cash position changes, orders are entered, trades are made or obligations are fulfilled or terminated. The combined limit is calculated in rubles, taking into account: participant s funds in rubles, US dollars, euros; net obligations and net claims in rubles, US dollars and euros calculated for trades with partial coverage and trades with full coverage (rubles); obligations and claims with regard to trades with partial coverage that may be made on the basis of registered orders; the limit covered by the Risk Fund; participant s indebtedness to the Clearing Center. Table Positions in Limits" This table shows the size of a participant s combined limit, as well as the value of the trading limit if the latter is set. combined LIMIT 6

7 Combined limit is the value that the Clearing Center calculates in Russian rubles for each participant in clearing. It limits market risks involved in trades with partial coverage that the Clearing Center concludes with the participant in clearing for whom the single limit is calculated. The new RMS will make information about the maximum number of lots that may be specified in the order available on the trader s workplace. The new RMS will also enable to calculate, at any time, the amount of funds in a particular currency needed for planned operations. 7

8 Trading limit enables participants to set an additional constraint on entering orders for instruments traded with preliminary partial coverage. It serves to restrict traders or clients operations. Trading limit is set in rubles on the grounds of participant s request in which the participant specifies its value, or on the grounds of the Clearing Center s decision based on findings regarding the deterioration of the participant s financial condition. Table Positions in limits" The value of the trading limit restricts the amount of the participant s funds accepted when calculating the single limit. The general principles and the procedure for determining the limits are covered in the Methodology of limiting operations in the MICEX foreign exchange market. Single coverage. In the new risk management system rubles, euros and US dollars are accepted in any combination as coverage for trading in currency pairs RUB/USD, RUB/EUR and USD/EUR. Assets pledged as coverage are accepted at a discount calculated basing on the risk of depreciation of the asset during two trading days (T+0 and T+1). Coverage against obligations in two oppositely directed positions with execution date TOD and TOM is calculated based on the price of the swap transaction. Coverage against obligations in the swap transaction is calculated only based on the price of the swap transaction. SINGLE COVERAGE 8

9 Rate of coverage is adaptive and varies depending on the volatility of the market; rate of coverage increases or decreases with a certain increment (conventionally, 0.5%) depending on the situation prevailing in the market; the restrictive level of the rate of coverage is 4%; is calculated by the formula provided in the Methodology of determining risk parameters of the MICEX foreign exchange market. The required size of coverage will be reduced about 1.5 times! 9

10 RISK PARAMETERS Basic risk parameters are: Central rate; The upper and lower limits of the price range; The upper and lower limits of the risk assessment range. Price range limits restrict the rates of orders entered by participants in clearing. Central rate is the assessment of the market rate at the close of trading. Limits of the risk assessment range are set during the clearing session symmetrically with respect to the calculated central rate. Limits of the risk assessment range are used to assess the ruble equivalent of net position when checking the adequacy of the coverage at the time of entering the order. Thus, the limits of the risk assessment range are the assessment of the risk of changes in the market rate that may take place within 2 trading days. The limits of the risk assessment range are calculated in accordance with the new approach to risk assessment, which ensures: adaptability of risk parameters to market changes, reduction of participants costs as a result of the lowering of the rates of coverage, predictability of changes of parameters. предсказуемость изменений параметров. The limits of the risk assessment range are calculated in accordance as per standard procedures, which include: the use of the method of exponential weighing when assessing the limits of the risk assessment range, determining the minimum increment of changes in the range limits, THE UPPER AND LOWER LIMITS OF THE RISK ASSESSMENT RANGE ARE THE MAIN RISK PARAMETERS 10

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12 lowering of the limits of the risk assessment range does not take place before a certain number of days after their last revision, a restrictive level is set below which the limits of the range do not go down. Deviations from standard procedures are possible in case of stressful events. Individual rates of coverage can be established for certain participants in clearing, which enables the Clearing Center: to ensure credit risk management for participants in clearing, to reduce the risks of concentration. The Clearing Center calculates and changes risk parameters during each clearing session. The Clearing Center may decide to change risk parameters in the course of trading. Table "Ranges of risk Assessment" This table shows the limits of the risk assessment range, set for a participant, for currency pairs RUB/USD and RUB/EUR. Procedures for determining risk parameters are covered in the Methodology of determining risk parameters of the MICEX foreign exchange market. 12

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14 MARGIN REQUIREMENT A requirement for the participant to cover his commitments for trades. Upon completion of Unified Trading Sessions in instruments with execution date TOM, the Clearing Center holds a clearing session, during which the Clearing Center: determines central rates; determines the upper and lower limits of the risk assessment range; determines the upper and lower limits of the price range, which will be set during the next day s trading session; calculates the new value of the single limit for each participant; defines participants who have margin requirements and the amounts of the specified margin requirements; prepares reports of margin requirements and submits them to participants. The margin requirement issued for a participant in clearing following the Mark-to-market procedure held at the close of trading, must be fulfilled by the participant not later than 16:00, Moscow time, of the next trading day. The participant can fulfill the margin requirement by: fulfilling obligations with due date of execution; changing the position by making trades that lead to an increase in the single limit; increasing the size of the coverage provided. If, in the course of trading, a participant has an unfulfilled margin requirement, he is not debarred from participation in trading. He may still enter orders to conclude trades with partial coverage, which do not lead to a decrease in the single limit. MARK-TO-MARKET PROCEDURE 14

15 A participant in clearing whose single limit has become negative has a margin requirement. The sum of the margin requirement equals the absolute value of the participant s current single limit. A margin requirement is shown in the table Positions in limits" as a negative planned position in the single limit and symbol "1" in this line in the column "Margin requirement". 15

16 SETTLEMENT OF UNFULFILLED OBLIGATIONS The Clearing Center settles cases of non-fulfillment or improper fulfillment of obligations with regard to trades with partial coverage with due execution date during additional Unified Trading Sessions. During the additional Unified Trading Session of the first type positions are closed compulsorily through the conclusion of the offset trades: in case of participant s non-fulfillment of margin requirement before the deadline; upon participant s failure to repay the debt incurred on the previous settlement date. The additional Unified Trading Session of the first type is held at 16:00. During the additional Unified Trading Session of the second type, deals with unscrupulous participants are made in the event of their partial or complete failure to fulfill final net obligations, and swap transactions are concluded with "donors" (УБ, НРД, the Bank of Russia) in case the Clearing Center s funds are insufficient to execute net claims of scrupulous participants in clearing. The additional Unified Trading Session of the second type is held at 20:00. Trades made during additional sessions will be shown in the workplace in the table of trades. SWAP TRANSACTIONS AND OFFSET TRADES AS A MECHANISM TO SETTLE UNFULFILLED OBLIGATIONS 16

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18 TRADING AND SETTLEMENTS SCHEDULE All participants are divided into two groups: those who have sent a Request to effect early settlements or Standing Order to effect early settlements (First Group); those who have not sent a Request to effect early settlements or Standing Order to effect early settlements (Second Group). Trading hours Opening of trading 10:00 Closure of trading in soft currencies, including the yuan: 11:00 Closure of trading in USD/RUB, EUR/USD and USD/RUB in instruments TOD for the First Group: 11:00 Closure of trading in USD/RUB, EUR/USD and USD/RUB in instruments TOD for the Second Group: 15:00 Closure of trading in instruments TOM: 17:00 Future plans include Closure of trading in instruments TOM for participants in clearing who have sent a Request or Standing Order for early close of trading: 17:00; Closure of trading in instruments TOM for participants in clearing who have NOT sent a Request or Standing Order for early close of trading: 19:00 Time of settlements Chinese Yuan: until 12:00 Soft currencies: until 13:00 Euros: until 17:00 Russian Rubles: until 20:00 US dollars: until 20:00 NCC fulfils its obligations with regard to trades with due date of execution continuously from (15:00) 11:00 till 20:00. A participant in clearing has the right to terminate trading in TOD and obtain a stock certificate at any time from 11:00 until the close of trading in instrument TOD by submitting an Application for participation in early settlements to the NCC. FLEXIBLE TRADING AND SETTLEMENTS SCHEDULE 18

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20 MICEX FOREIGN EXCHANGE MARKET The MICEX Client Center 13 B. Kislovskiy per., Moscow, Telephones: (495) , (495) , ext Additional information is available on the MICEX web site:

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23 New Risk Managenent System in MICEX FX Market