COLLATERAL MANAGEMENT SERVICE Change Document March 2015 Release
LEGAL DISCLAIMER The content of this document is subject to change without notice. Although this document has been prepared on the basis of the best information available at the moment of preparation, NASDAQ OMX Group, Inc., NASDAQ OMX Clearing AB and their affiliates make no representations or warranties with respect to the information and accept no liability for any decision taken on the basis of this document or for any other use made of the contents of this document. NASDAQ OMX Group, Inc., NASDAQ OMX Clearing AB and their affiliates assume no responsibility for any errors or omissions. http://www.nasdaqomx.com/europeanclearing 2
CONTENTS 1 INTRODUCTION... 5 2 CHANGES... 7 2.1 ACCOUNTS... 7 2.2 MARGIN REQUIREMENT... 7 2.2.1 COMMODITY PRODUCTS... 7 2.2.2 EQUITY PRODUCTS... 9 2.2.3 FIXED INCOME PRODUCTS... 9 2.3 DAILY CASH SETTLEMENT... 11 2.4 CASH OPTIMIZATION SETTINGS... 11 2.5 MANUAL COLLATERAL TRANSACTIONS... 13 2.6 CALL BACK HANDLING... 13 2.7 TIMINGS AND DEADLINES... 13 2.8 REPORTS... 14 2.9 SYSTEM AND USER ACCESS... 15 2.10 RULES AND LEGAL AGREEMENTS... 15 2.10.1 LEGAL FRAMEWORK... 15 2.10.2 UPDATE OF RULES... 15 2.10.3 UPDATE OF CUSTODY ACCOUNT AGREEMENTS... 16 http://www.nasdaqomx.com/europeanclearing 3
DOCUMENT DATA + REVISIONS 16 January, 2015 Deadlines for the daily cycle updated http://www.nasdaqomx.com/europeanclearing 4
1 INTRODUCTION This document describes changes to be implemented for the Nasdaq Collateral management service (CMS) in the planned March 2015 system release. Please note that all information provided in this document has been prepared for information purposes only and should not be relied upon as any form of advice and does not form the basis of any contractual relationship between the recipient and Nasdaq OMX Clearing AB. Such relationship is governed solely by the terms and conditions of Nasdaq OMX Clearing AB s applicable clearing rules, custody account agreements and other legal agreements between the clearing participant and NASDAQ OMX Clearing AB. Amendments to the clearing rules and custody account agreement to accommodate the changes to Nasdaq OMX Clearing AB s collateral management service will be published separately in accordance with Nasdaq OMX Clearing AB s ordinary procedures for such amendments. CMS is the service managing collateral for clearing on Nasdaq s Financial and Commodities derivatives markets. The service manages both cash and non-cash collateral for margin requirements as well as cash transactions for daily cash settlement (premiums, fees, variation margin). The following sections of this document describe changes to the respective area of the collateral management service. Readers of the document are expected to be familiar with the structure and concepts of the collateral management service. For a complete description of the collateral management service, please see the Collateral Management Service Service Description on the Nasdaq website 1. + OVERVIEW OF CHANGES The central change in the March 2015 system release is the implementation of a cash optimization feature where payments in respect of cash collateral and daily cash settlement are combined into one optimized flow using the following principles: Both cash collateral and daily cash settlement transactions are recorded on the same account Cash collateral on the account is used to cover daily cash settlement requirements (per currency) Positive daily cash settlement is recorded on the account to cover margin requirement (per currency) Direct debit instructions are created for the account if o a daily cash settlement requirement still remains after subtracting cash collateral 2 o there is a total collateral deficit on the account in the base currency Credit instructions are created for the account (with same day value) if there is a total collateral surplus in the base currency after the daily cash settlement is finalized the credit instructions can include both automatic cash collateral call backs and positive cash settlement 1 http://www.nasdaqomx.com/europeanclearing/collateral-management/cash-optimization 2 Daily cash settlement requirements are always settled in each applicable currency and can only be offset by positive cash collateral in the same currency. http://www.nasdaqomx.com/europeanclearing 5
To allow for the implementation of the new feature changes in a number of areas are required as summarized below and described in detail in the following sections of this document. A new account role, cash optimization account, is introduced Modifications to the calculation of payment margin A set of parameters are introduced for participants to configure the new feature Changes to timings and deadlines in the daily cycle New reports are introduced as well as changes to some current reports Updates to the Clearing Rules as well as some related legal agreements + MARCH 2015 SYSTEM RELEASE The March 2015 system release will comprise a full system upgrade of both the clearing and custody system used for the collateral management service 3. Note that this document only describes changes in functionality directly related to the collateral management service whilst the release may also include changes to other features not related to collateral management. For the full release notes for the March 2015 system release, please see the Nasdaq website 4. 3 Genium INET is Nasdaq s clearing system commonly referred to as the clearing system. WIZER Custody is Nasdaq s custody system commonly referred to as the custody system. 4 http://www.nasdaqomx.com/transactions/technicalinformation/geniuminet/enhancements http://www.nasdaqomx.com/europeanclearing 6
2 CHANGES 2.1 ACCOUNTS In the cash optimization model, payment obligations in respect of cash collateral and daily cash settlement are combined into a single cash transaction per currency and segregation structure (e.g. house, client). In order to group the different requirements together, a new cash optimization account role is introduced. By default, the existing cash settlement account will act as cash optimization account leaving the account structure unchanged. 2.2 MARGIN REQUIREMENT In connection with the introduction of cash optimization, there will be some changes to the payment margin calculations. In the following sections, the changes to payment margin are described per derivatives market; Commodity, Equity and Fixed Income. 2.2.1 COMMODITY PRODUCTS A payment margin is currently required to cover pending settlement for long allowance and electricity certificate positions. The use of positive cash settlement to cover margin requirements in the cash optimization model will allow for a margin credit based on pending settlement for short allowance and electricity certificate positions. Following is specifications and calculation examples. + ELECTRICITY CERTIFICATE MARKETS EXAMPLES Electricity certificate deferred settlement future (DSF) payment margin shall ensure the forthcoming settlement. The payment margin is calculated from end-of-day on the Expiration day until (not including) end-of-day on the business day before the settlement day. PAYMENT MARGIN CALCULATION FOR ELECTRICITY CERTIFICATE DSF Product Instrument series Position 5 DSF Tonnes 1,000 Trade price 10 Expiration fix 8 ELCEURMAR-14 http://www.nasdaqomx.com/europeanclearing 7
DSF instrument series payment margin equals the sum of the value of the position at expiration fix and the Contingent Variation Margin on the expiration, and the calculation of payment margin for the ELCEURMAR- 14 is performed in the following way: Long position: Payment margin(elceurmar 14) = ( 8 5 1000 C) + ( 8 10) 5 1000 C = 50 000 Short position (new): Payment margin(elceurmar 14) = ( 8 5 1000 C) + ( 8 10) 5 1000 C = 50 000 + ALLOWANCE MARKETS EXAMPLES Payment margin is calculated for an allowance day futures position, futures and DSF to ensure the forthcoming settlement. The payment margin is calculated from end-of-day on the expiration day until (not including) end-of-day on the business day before the settlement day. PAYMENT MARGIN CALCULATION FOR ALLOWANCE DSF Product Instrument series Position DSF EUADEC-14 5 lots Tonnes 1,000 Trade price 10 Expiration fix 8 DSF instrument series payment margin equals the sum of the value of the position at expiration fix and Contingent Variation Margin on the expiration day, and the calculation of payment margin for the EUADEC- 14 is performed in the following way: Long position: Payment margin(euadec 14) = ( 8 5 lots 1000 T) + ( 8 10) 5 lots 1000 T = 50 000 Short position (new): Payment margin(euadec 14) = ( 8 5 lots 1000 T) + ( 8 10) 5 lots 1000 T = 50 000 PAYMENT MARGIN CALCULATION FOR ALLOWANCE FUTURES Product Day Future Instrument series NCD3009-13 Position 10 lots Tonnes 1,000 Expiration fix 0,5 The payment margin for an Allowance Future day instrument series is calculated using expiration fix: Long position: Payment margin(ncd3009 13) = ( 0,5 10 lots 1000 T) = 5000 Short position (new): Payment margin(ncd3009 13) = ( 0,5 10 lots 1000 T) = 5000 http://www.nasdaqomx.com/europeanclearing 8
2.2.2 EQUITY PRODUCTS Payment margin is currently calculated end-of-day on the day before the settlement day to cover pending settlement for index futures, index forwards and index options. After the implementation of cash optimization, the settlement requirements will be included in the end-of-day margin and collateral evaluation on the day before the settlement day and payment margin will not be required on the settlement day. 2.2.3 FIXED INCOME PRODUCTS Payment margin is currently required to cover pending settlement for Government Bond Forwards (GBF), Government Bond Options (GBO), Mortgage bond forwards (MBF), CIBOR-futures, RIBA-futures and Forward Rate Agreements. After the introduction of cash optimization the settlement requirements will be included in the end-of-day margin and collateral evaluation on the day before the settlement day. Payment margin will therefore no longer be included in the official evening margin calculation on the day before the settlement day. Payment margin will still be required for monthly cash settlement and expiration for Government Bond Forwards, Government Bond Options, Mortgage bond forwards, RIBA-futures, CIBOR-futures and Forward Rate Agreements but not on the monthly cash settlement day and not on the expiration settlement day. + SPECIFICATIONS AND ILLUSTRATION If you enter a fixed income forward or option contract when there is no monthly cash settlement in between the day of entering the contract and the day of expiration, then you are only required to post payment margin in connection with the expiration. If you on the other hand enter into such a contract when there are one or more monthly cash settlements in between the day of entering the contract and the day of expiration, then you are required to post payment margin in connection with both the monthly cash settlement(s) and the expiration. Note that the margin requirement in the official evening calculation has to be covered with collateral before 11:00 CET on the following business day. Payment Margin for Monthly Cash Settlement For GBFs, GBOs, MBFs and FRAs entered before a monthly cash settlement, payment margin is required in connection with the monthly settlement(s). The official evening margin calculations will include payment margin according to the following timeline. http://www.nasdaqomx.com/europeanclearing 9
Figure 1 - Payment Margin for monthly cash settlement for GBFs, GBOs, MBFs and FRAs Payment Margin for Expiration Settlement Payment margin is required in connection with the expiration of GBFs, GBOs, MBFs and FRAs. The official evening margin calculations will include payment margin according to the following timelines. Figure 2 Payment margin for expiration GBFs, GBOs and MBFs Figure 3 - Payment margin for expiration for FRAs As can be seen in the timelines above, payment margin will no longer be included in the official evening margin calculations on the day before (monthly or expiration) settlement. http://www.nasdaqomx.com/europeanclearing 10
2.3 DAILY CASH SETTLEMENT With cash optimization, positive daily cash settlement is used to cover collateral deficit, and cash collateral is used to cover daily cash settlement requirements. Daily cash settlement transactions showing variation margin (mark-to-market settlement), premiums and fees will continue to be calculated as separate transactions outside optimization and presented both in the system and on reports. The daily cash settlement transactions will after being calculated be used as components of the cash optimization process. With the change daily cash settlement transactions will be presented per margin requirement account instead of as currently per cash settlement account. Note that daily cash settlement transactions are always in the traded instrument s currency. However, if a positive daily cash settlement amount is recorded on an account that amount will be considered as cash collateral and will be used to cover a collateral deficit. 2.4 CASH OPTIMIZATION SETTINGS Each participant can configure a number of parameters for the cash optimization feature. Parameters are set for each margin requirement account meaning that a different behaviour can be achieved for different accounts (i.e. different behaviour for house and client or for specific individual accounts). The parameters that are set for each margin requirement account are: + DIRECT DEBIT CURRENCY The parameter specifies in which currency a direct debit instruction is created for cash collateral deficits on the account. Possible values are either margin currency or base currency. By default the parameter will be set to margin currency. Direct Debit in margin currency (default) Margin currency is the currency in which a margin requirement is presented, for the Financial Markets this is by default the same currency as the traded instrument s currency and for the Commodities Markets all margin requirements are by default converted to a single risk currency. With the parameter set to margin currency the system will optimize cash transactions currency by currency. If there is a total net collateral deficit for the account the system will, after taking into account any daily cash settlement transactions in the applicable currency, create direct debit transactions for each of the currencies creating the deficit. With this setting cash collateral is optimized per currency in order of priority (see below). http://www.nasdaqomx.com/europeanclearing 11
Direct Debit of cash collateral in base currency The base currency is used to present the net total collateral surplus/deficit for an account in a single currency 5. With the parameter set to base currency the system will optimize cash transactions based on the selected base currency. If there is a total net collateral deficit for the account the system will, after taking into account any daily cash settlement transactions, create a direct debit instruction for the total deficit amount in the base currency. With this setting the base currency is used to cover all collateral deficits. + CURRENCY PRIORITY The currency priority specifies in which order currencies are prioritized for direct debit and credit of cash collateral. The setting will for example decide in which currency/currencies credits are created in case of an automatic cash collateral surplus call back (some cash collateral might have to be kept as not to create a deficit on the account) and also to determine in which currency to create a direct debit should there be a bank holiday for a participant s selected base currency. + CURRENCY LIMIT The currency limit defines, per currency, an amount of cash to be excluded from an automatic cash call back in case of a collateral surplus (as part of the cash optimization process), i.e. creating a buffer of cash on the account. The value of the limit can range from zero (never keep any surplus cash collateral on the account, i.e. no buffer) to infinite (never attempt to call back any cash surplus from the account). Note that the currency limits are always overridden by daily cash settlement transactions, i.e. positive cash collateral will be used to cover a daily cash settlement requirement before the limit is evaluated. + LOCKED CURRENCY LIMIT A currency limit locked for a certain currency. A locked limit defines an amount of cash collateral to be kept on the account at all times, i.e. a fixed buffer of cash collateral that cannot be used to cover daily cash settlement movements. Apart from helping the participants to keep a constant cash amount on their custody account to cover margin requirements, the limit can also help reduce the individual participant s concentration to collateral issuers in case the participant is also posting on-demand bank guarantees or securities as collateral. Locked limits are set by the clearing house in collaboration with the participant. 5 The base currency can be set to any of the six available currencies; DKK, EUR, GBP, NOK, SEK and USD. http://www.nasdaqomx.com/europeanclearing 12
2.5 MANUAL COLLATERAL TRANSACTIONS The cash optimization feature will assume that any deficit in collateral is to be covered by cash, i.e. by creating one or several direct debit instruction(s) according to the settings on each account. Preliminary reports will be created where participants can see the result of the calculation and what payments will be executed should they take no further action. It will still be possible to alter collateral balances on an account before any debit instruction is executed by doing so before the final cash optimization calculation is run at 09:30 CET in which payments are re-calculated using the actual collateral balance at that time. This will allow participants who prefer to cover deficits with non-cash collateral to do so. The procedures for manually posting and calling back collateral will remain unchanged. 2.6 CALL BACK HANDLING Call backs of cash collateral can be the result of either the cash optimization process (automatic cash call back) or the result of a manual cash call back request. Call back of non-cash collateral can also be requested as a manual instruction. Automatic cash call backs will be credited with same day value at about 14:00 CET. A manual call back can be used to e.g. repay the buffer (currency limit) that has been generated on the custody account. The call back request will always trigger an evaluation of current collateral values against margin requirements including potential locked currency limit on account. Once approved, the call back will be registered for the following business day. With the introduction of the cash optimization feature all approved call backs will be put in pending state until all outstanding direct debit transactions are completed. For a participant this means that no cash or non-cash collateral call backs will be executed for their accounts until all their direct debit instructions for the current business day are completed. 2.7 TIMINGS AND DEADLINES With the implementation of cash optimization some of the timings and deadlines in the daily cycle will change. A preliminary calculation batch for cash optimization will be introduced in the evening at approximately 21:30 CET when this batch is done reports will be created A final calculation batch for cash optimization will be introduced in the morning at 09:30 this will be the deadline for manually altering collateral positions before direct debit instructions are sent The time for executing direct debit instructions will be moved to 09:45 CET The time for the official margin call will be moved to 11:00 CET The time for executing credit instructions will be moved to 14:00 CET http://www.nasdaqomx.com/europeanclearing 13
2.8 REPORTS A number of changes to clearing system reports will be introduced as a result of the implementation of cash optimization. There will also be a new report showing the cash optimization transactions as well as a new report giving a total summary of the payments for a specific business day. + CASH SETTLEMENT REPORT (UPDATED) The Cash Settlement report is an existing report that will be updated to reflect the new cash optimization feature. Summary of changes: Payment reference removed (this can now be found in the Payments report) Cash settlement amounts will be summarized per margin requirement account instead of per cash settlement account + CASH OPTIMIZATION REPORT (NEW) The Cash Optimization report is a new report that will reflect the new cash optimization feature. Summary of contents: Held collateral evaluated against cash settlement and margin requirements Detailed cash optimization information per margin requirement account + COLLATERAL TRANSACTIONS (UPDATED) The Collateral Transactions report is an existing report that will be updated to reflect the new cash optimization feature. Summary of changes: Cash optimization transactions included + PAYMENTS REPORT (NEW) The Payments report is a new report showing the total net cash transactions to be executed for a business day including any cash optimization transactions. The report will show the net payments per currency for a participant s respective accounts. Summary of contents: Cash optimization account Payment reference Currency Total cash settlement Automatic cash collateral deposit or withdrawal Total amount to pay or receive http://www.nasdaqomx.com/europeanclearing 14
+ CASH SETTLEMENT AGENT REPORT (UPDATED) The Cash Settlement Agent report is an existing report. The report format will remain the same but the amounts will now reflect the cash optimization payments. For examples of the new and changed reports, please see the Nasdaq website 6. 2.9 SYSTEM AND USER ACCESS + FRONT-END APPLICATIONS Clearing Workstation 1 and Clearing Workstations 2, as well as CMS Web will be updated to include functions to configure the new cash optimization settings as described above. Also, a cash optimization view will be added where participants can view the cash optimizations transactions. New collateral transaction types and states will be introduced in the collateral transactions view which will now also include cash settlement transactions. + OMNET API All changes available in the Clearing Workstation and CMS Web will also be available over the OMnet API. The changes will be documented in the OMnet API manual which will be published in October 2014. 2.10 RULES AND LEGAL AGREEMENTS 2.10.1 LEGAL FRAMEWORK In connection with the transition from the current collateral management structure to a cash settlement solution where one cash flow will be used for cash settlement and margin requirements, certain changes will be made, affecting the legal relationship between NASDAQ OMX Clearing AB and its clearing participants. Most importantly, certain changes will be made to the Clearing Rules of Nasdaq Derivatives Markets and the Clearing Rules of Nasdaq Commodities (jointly referred to as the Rules ). 2.10.2 UPDATE OF RULES The Rules will be updated to reflect the implementation of cash optimization. Inter alia, the Rules will be updated to reflect that the mandate agreement issued by the clearing participant, authorizing NASDAQ OMX Clearing AB to instruct settlement banks to debit and credit the clearing participants designated accounts, will be included in the Rules and no longer be a separate document. The changes to the Rules will mainly affect the sections governing posting of collateral, margin and cash settlement. The amendments will be published separately in accordance with NASDAQ OMX Clearing AB s ordinary procedures for such amendments. 6 http://www.nasdaqomx.com/europeanclearing/collateral-management/cash-optimization http://www.nasdaqomx.com/europeanclearing 15
2.10.3 UPDATE OF CUSTODY ACCOUNT AGREEMENTS The Collateral Custody Account Agreement, including the general terms, sets out certain rights and obligations of NASDAQ OMX Clearing AB and the account holder in relation to each collateral custody account. Certain amendments will be made to the general terms to reflect the changes to be made in connection with implementation of the optimization. The amendments will be published separately in accordance with NASDAQ OMX Clearing AB s ordinary procedures for such amendments. http://www.nasdaqomx.com/europeanclearing 16