Bond ETP - jse.co.za ETP... · • The JSE is responsible for managing the ETP Project delivery...

Bond ETP Market training: Settlement operations June 2018

Session Structure

Session schedule:

Session 1: 09h00 to 10h15

Tea Break: 10h15 to 10h45

Session 2: 10h45 to 12h00

2

Date Settlement Operations

Risk and Default Management

Thu, 7 June 2018 9:00 to 12:00 13:00 to 16:00

Mon, 11 June 2018 9:00 to 12:00 13:00 to 16:00

Thu, 14 June 2018 9:00 to 12:00 13:00 to 16:00

Training session schedule:

To provide an overview of the key settlement model principles and

operational process changes that will be introduced as part of the

launch of the new central order book trading of SA government bonds

i.e. the Bonds ETP Project

Session objectives

Note: This training is focused on the broader settlement model principles and processes of the Bond ETP market and does not cover the individual internal firm/departmental system or process changes. Individual firms/departments should conduct their own necessary internal change management prior to the project go-live (i.e. target date 27 Jun 2018)

3

Agenda

• Overview of agreed settlement timelines and processes

Background

Bonds market landscape

Key settlement model principles

Settlement process flow, obligations and cut-off times

Back-to-back (BTB) links and settlement groups

Trade reconciliation

• Standard settlement day walkthrough

Daily settlement activities and associated reports

Exceptions handling scenarios

• Exceptional events

Trade cancellations

Operational events (Rolling) 4

• Overview of settlement timelines and processes

Background










Trade cancellations

Operational events (Rolling) and business continuity 5

Agenda

Bond ETP Background

• In 2012 National Treasury (NT) formed an industry-wide committee called the Bond Market Development Committee (BMDC) whose mandate was to consider developmental issues facing the SA bond market.

• Representation included the JSE, Strate, the Association of Savings and Investments of South Africa (ASISA), the SA Reserve Bank (SARB) and the Financial Services Board (FSB).

• As a result of the work undertaken by the BMDC, in 2013 National Treasury indicated the requirement to monitor Primary Dealers' quoting obligations in a secondary market.

• The Bond Electronic Trading Platform (ETP) program was thus born, to implement an electronic trading platform which facilitated anonymous trading via a live central order book for Primary Dealers and introduced price transparency in the local debt market

• The JSE is responsible for managing the ETP Project delivery with the project implementation is overseen by a market-representative Project Steering Committee

• Planned go-live for the project is in Q2 2018.

6


Background










Trade cancellations


Agenda

Bond Market Landscape

IRC (Interest Rate and Currency)

ETP (Electronic

Trading Platform)

OTC (Over The Counter)

SLB Business Partner

Strate (CSD)

CSDP

Strate Collateral

Management Services

Client

Settling Bank

Foreign CSD SARB PASA Issuer/

Issuer Agent NT

New ETP trading platform

NB. No changes to existing downstream

systems


Background










Trade cancellations


Agenda

Key Settlement Model Principles

• T+3 trading only

• Alignment as far as possible between ETP, IRC and OTC markets

• Back-to-back links will be used across ETP, IRC and OTC markets

• No settlement failures of ETP trades

• National Treasury guarantees as lender of last resort

10


Background










Trade cancellations


Agenda

Settlement process flow

12

13

S-2 S-1 S

Members

Settlement Instructions to CSDP (non-member)/Member in position to settle

CSDP commit becomes unconditional

Ensure CSDP is in position to commit

CSDPs

CSDP commit

Allocations / principal assignments complete

17h00

8h00 10h00 12h00 14h00 16h00 18h00

/8h00

10h00 12h00 14h00 16h00 18h00

/8h00

10h00 12h00 14h00 16h00 18h00

/8h00

T+3 trades T+1 trades T+2 trades

08h30

Settlement Instructions to CSDP (non-member)/Member in position to settle & ensure CSDP in position to commit

12h00

T+0 trades

CSDP commit 13h00

13h00 – 15h15

Settlement timelines and obligations Current IRC market

18h00

Exceptions handling processes

Settlement timelines and obligations ETP market

14

T+1 (S-2) T+2 (S-1) T+3 (S)

Member obligations

CSDP commit becomes unconditional

Ensure CSDP is in position to commit

CSDP obligations

CSDP commit

8h00 10h00 12h00 14h00 16h00 18h00

/8h00 10h00 12h00 14h00 16h00

18h00

/8h00 10h00 12h00 14h00 16h00

18h00

/8h00

08h30

13h00 – 15h15

18h00

Exceptions handling processes

A. Members will have up to 17h30 on S-1 to ensure that their CSDP is in a position to commit to their trade i.e. members need to ensure stock or cash is available at their CSDP

B. CSDPs to commit to trade legs by latest 18h00 on S-1

C. At 13h00, the final settlement exceptions handling processes is kicked-off where all remaining unsettled trades are isolated and cover trades requested from respective members before Strate’s final settlement run at 15h15

NB: No penalties for contraventions of these timelines will be applicable at go-live. Rule contravention will be monitored and penalties will be reassessed if need be.

A

B

C

Settlement timelines and obligations Exceptions handling process (13:00 to 15:15 on S)

15

T+3 (S)

13h00 13h15 13h30 13h45 14h00 14h15 14h30 14h45 15h00 15h15 15h30 15h45 16h00 16h15 16h30

• Any ETP trades in an unstable group will be unlinked and isolated for settlement • As a result, various trades in that settlement group may become uncovered

Members will have 45min to source cover for their uncovered ETP trades

If covers are not in place by 14h00, members will be instructed to obtain cover from NT as the last resort

Final Strate settlement run

SAMOS cutoff

Settlement administration for cover trades to be finalised by CSPD


Background










Trade cancellations


Agenda

Back-to-Back Functionality

• BTB is a risk mitigation tool used by the CSDPs to link transactions with the dependencies

• The following transactions can be linked by the CSD Participants:

17

ETP IRC Off-market SLB

ETP

IRC

Off market

SLB

Back-to-back (BTB) linking process

18

• To apply back-to-back links, all trade legs need to be part of the same:

• Custody account

• ISIN

• Settlement date

• CSDP logic for linking and committing to a sale transaction follows these basic principles:

Does client have sufficient, unencumbered holdings?

Is there a purchase transaction settling on or before the sale transaction?

Is there a SLB/Repo transaction settling on or before the sale transaction?

Commit

N Y

N

Y

Y

N

Leg remains uncommitted

Link and Commit

Link and Commit

Settlement Groups

• Once CSDPs have created the back to back links necessary to conditionally commit to the settlement of trades, Strate’s system automatically creates settlement groups for more efficient settlement

• Settlement groups consist of all trade legs that have back-to-back links applied to them within a specific ISIN for a particular settlement date

• Unlike back to back links that can only be applied to one custody account, settlement groups can span across members or clients and CSDPs as it is possible for settlement groups to have multiple back to back links within the groups, thus settlement groups can get quite large

• Only when all transactions within a group are committed and total deliveries matches total receives (Cash and Securities), will the group move forward for settlement

19

Back-to-back links and settlement groups

20

ETP IRC OTC

Buy 1PD1 ---------- Sale 1PD2 Buy 2PD2 ---------- Sale 2CL1

Buy 3PD2 ------------ Sale 3PD3 Buy 4PD3 ------------ Sale 4CL2

Buy 5PD4 ---------- Sale 5PD5

BTB 1CSDP1

BTB 2CSDP2

ETP IRC OTC

Buy 1PD1 ---------- Sale 1PD2 Buy 2PD2 ---------- Sale 2CL1

Buy 3PD2 ------------ Sale 3PD3 Buy 4PD3 ------------ Sale 4CL2

Buy 5PD4 ---------- Sale 5PD5

BTB 1CSDP1

BTB 2CSDP2

1

2

3

1

2

SCEN

AR

IO

1

SCEN

AR

IO

2

In Scenario 1 the way in which links have been applied would create 3 different settlement groups

In Scenario 2 the inclusion of Buy 3 in BTB 1 creates one large group where there were previously 2 smaller ones


Background










Trade cancellations


Agenda

Reconciliation of trade data for settlement

• ‘Trade Recon 1’ reconciles trades between the Strate system and the MTS trading engine. This reconciliation is done daily at end-of day by MTS providing a trade file to State to reconcile

• The same MTS file will be used by the JSE for ‘Trade Recon 2’ which will reconcile trades between MTS and JSE systems

• ‘Trade Recon 3’ will be between the PDs and their appointed CSDPs to ensure balancing across the value chain.

22

TradingFront End

MTS Trading Engine

StrateSettlement System (BaNCS)

CSDPSettlement Systems

Trade info

Trade Recon 1 Trade Recon 3

Trade info

JSETrade Vault

Trade Recon 2A

B

Resolution in the case of recon misalignment

Point of discrepancy Steps to be followed

Trade Recon 1 (MTS and Strate)

• Strate to notify JSE and CSDPs that there is a discrepancy in the recon

• Strate to liaise with MTS to determine point of break/failure • MTS to replay messages if necessary • All participants to reconcile again once problem has been resolved

Trade Recon 2 (MTS and JSE)

• JSE will liaise with MTS to determine point of break/failure • JSE will determine whether or not margin or any other JSE

downstream information is impacted • JSE will liaise with PDs if there is action necessary regarding

margin

Trade Recon 3 (Trading Member and CSDP)

• CSDPs to notify Strate of discrepancy, PDs to notify the JSE • Strate to confirm which link is affected (i.e. A or B or both) in the

preceding diagram • All participants to reconcile again once problem has been resolved

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Background










Trade cancellations


Agenda

Daily settlement activities and associated reports Clearing and settlement activities on S

25

JSE Settlement Authority monitors uncommited positions and works with members to have these committed before 13h00

First Settlement Run (9h30)

Exceptions handling period

08h00 09h00 10h00 11h00 12h00 13h00 14h00 16h00 17h00 18h00

Final Settlement Run (15h15)

15h00

SAMOS Cut-off (16h30)

• JSE SA will use the CMFE/JSE PTS report, provided by Strate, to monitor settlements from SOD on S until settlement is complete

• Also from the morning of S and after every settlement run, Strate disseminates multiple reports to CSDPs to aid in the management of uncommited trades. CSDPs receive the following reports from Strate which are then used to follow-up with clients:

• Unstable BTB Link Report (BP-ID_S0_UNSTABLE_BTB_Pivotview)

• Lists trades which are not committed to that are causing unstable settlement groups, includes IRC and ETP markets

• Uncommitted Report (BP-ID_UNCM_ONMKT)

• List of trades for all markets that are uncommited to in the IRC and ETP markets

• Counterparty Uncommitted Report (BP-ID_GENERIC_UNCOMMITTED_TRADES)

• List of trades for the IRC market only where the counterparty CSDP has not yet committed

ETP Training/ZA100019_S0_UNSTABLE_BTB_Pivotview.csv

ETP Training/ZA100703_UNCM_ONMKT.csv.csv

ETP Training/ZA100703_GENERIC_UNCOMMITTED_TRADES.csv

• Unstable BTB Link report (BP-ID_S0_UNSTABLE_BTB_Pivotview)

• Uncommitted Trades Report (BP-ID_UNCM_ONMKT)

26

ISIN CODECTRCSDPBP

ID

CTRCSDPA

CNO

CTRSCRIP

ACNOLOCKEDINREF

SETTLEMENTPO

OLREF

COUNTER

BTBREF

COUNTER

TRADEREF

COUNTERSETTLE

MENTTYPE

COUNTERCLI

ENTTYPE

NOMINAL

VALUE

SETTLEMENT

DATETRADEACPTDATETIME LastUpdated TimeStamp

COUNTER

AFFISTATUS

ZAG000096165 R 2 023 ZA100019 153843 1021314 400137RSA0018143 301875 100163680 XDVP 7 -10000000 20180528 2018-05-23-12.02.38 2018-05-24-08.51.14.474000NAFI














Daily settlement activities and associated reports Report Views

• As a pre-emptive measure in identifying committed trades which are in unstable groups, Strate also generates and disseminates to the JSE and CSDPs the following reports every hour from 09h00:

• ETP Unstable Report: List of ETP trades present in unstable groups, where the unstable group is caused by an IRC or OTC trade

• IRC Unstable Report: List of IRC trade links that are in unstable groups, where the unstable group is caused by an OTC trade

• The ETP Unstable Report will be forwarded to PDs from the morning of S, to inform them of a potential need to cover an ETP trade, should links need to be broken at 13h00. The PD is not obliged to take any action on this information.

• At 13h00 Strate will instruct CSDPs to break links as identified by the ETP and IRC Unstable Reports

27

JSE Settlement Authority monitors uncommited positions and works with members to have these committed before 13h00

First Settlement Run (9h30)

Exceptions handling period

08h00 09h00 10h00 11h00 12h00 13h00 14h00 16h00 17h00 18h00

Final Settlement Run (15h15)

15h00

SAMOS Cut-off (16h30)

Daily settlement activities and associated reports Clearing and settlement activities on S

ETP Training/ETP_UNBSTABLE_REPORT.csv

ETP Training/IRC_UNSTABLE_REPORT.csv

• ETP Unstable Report

• IRC Unstable Report

28

Daily settlement activities and associated reports Report Views


Background










Trade cancellations


Agenda

Settlement exceptions handling process Ensuring ETP trades do not fail

• As agreed by the project steering committee, there will be no settlement failures of ETP trades

• As a result, during the exceptions handling period, ETP trades which have not yet settled due to a dependency on a link, will be isolated and specifically covered, by NT as a last resort if necessary

• At 13h00, the below principles will apply to all groups still in an unstable state due to trades not being committed to:

• If an OTC trade is the trade causing a group, containing on market trades (ETP and IRC) not to settle, unstable links will be broken by CSDPs on instruction from Strate

• If an IRC trade is the trade causing a group containing an ETP trade not to settle, unstable links will be broken by CSDPs on instruction from Strate

• If an ETP trade is the trade causing a group, containing other on market trades (ETP or IRC) not to settle, then no links will be broken as the ETP trade will be covered before the final settlement run occurs at 15h15 on S

30

Exceptions handling processes: A Practical Example

• The above settlement group which will be used to illustrate different the courses of action or lack thereof, to be taken at 13h00 if the group is unstable caused by:

• Scenario 1: Uncommitted Sale 5 (IRC)

• Scenario 2: Uncommitted Sale 6 (OTC)

• Scenario 3: Uncommitted Sale 2 (ETP)

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Buy 1PD1 -------- Sale 1PD3

ETP IRC

Buy 3PD3 -------- Sale 3CL1

Buy 4PD3 -------- Sale 4PD4 Buy 2PD3 -------- Sale 2PD6

Buy6CL1 -------- Sale 6CL2

OTC


BTB2

BTB3

Group 1

BTB1

Exceptions handling processes: A Practical Example Scenario 1: IRC trade holding up group

32


ETP IRC




OTC


BTB1 BTB2

BTB3

BTB1 broken

1

CSDPs re-commit

2

PD to source cover

3

Group 4

Group 1 Group 2

• At 13h00, IRC Sale 5 is still uncommitted to, thus Strate will instruct PD3’s CSDP to break BTB1, which will result in the breaking up the settlement group, Group 1

• Once links are broken, CSDPs will then re-commit to Buy 3 and Buy 4, assuming all the necessary funds are in place and available

• PD3 will then need to source cover for Sale 1 in order for enable settlement for all ETP trades

• ETP trades will not be linked to any trades other than dedicated cover trades booked to enable settlement of all ETP trade

Group 3

Exceptions handling processes: A Practical Example Scenario 2: OTC trade holding up group

33


ETP IRC




OTC


BTB3

BTB1 broken

1

CSDPs re-commit

2

PD to source cover

3

Group 5

Group 1 Group 2

• At 13h00, OTC Sale 6 has still not been committed to so Strate will instruct PD3 and Client1’s CSDPs to break BTB1 and BTB 2 respectively

• Once links are broken, CSDPs will then re-commit to Buy 3 and Buy 4, assuming all the necessary funds are in place

• PD3 will then need to source cover for Sale 1 in order for enable settlement for all ETP trades

• Client 1 will also need to source cover for Sale 3, however since the NT facility is not available to non-PDs Trade 3 the possibility exists that Trade 3 may fail

BTB2 broken

1

Group 3

Client to source cover

3

Group 4

Exceptions handling processes: A Practical Example Scenario 3: ETP trade holding up group

34


ETP IRC




OTC


BTB2

BTB3

Group 1

No links broken. PD6 to source cover from NT as a last resort at 14h00

• At 13h00, group has not settled due to uncovered ETP Sale 2

• Since the trade holding up the group is an ETP trade, NT will step in as a last resort to ensure that settlement of the trade occurs, hence no links will be broken.

• PD6 will then need to borrow from NT at 14h00 if they have not managed to source the required securities to cover their position by that time

• Settlement should be finalised by Strate’s final settlement run at 15h15

BTB1

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PDs JSE CSDPs STRATE

T+3/S (01:00pm) Start

Identifies trade (OTC or IRC) holding up ETP trade settlement

Breaks links related to ETP trades and sends

notification to PD Receives NAFI

messages for newly uncommitted trades

Notified that trade needs to be covered

T+3/S (01:15pm)

Sources cover

If cover sourced before 02:00pm

Opens window for cover trade to be booked

Requests window to book cover trade

Books cover trade

Links cover trade to ETP trade and commits

Continuation on next slide…

Settlement exceptions handling process Detailed process flow

For discussion

36

PD JSE CSDP STRATE

T+3/S (02:00pm)

Final settlement run occurs

Required to obtain cover from NT using facility in place

T+3/S (03:30pm)

Opens window for cover trade to be booked (via

IRC market)

Books cover trade

Links cover trade to ETP trade and commits

End

SAMOS payment window closed at 4:30pm

Requests window to book cover trade with SARB

Settlement exceptions handling process Detailed process flow (cont.)

For discussion

If cover not sourced before 02:00pm


Background










Trade cancellations


Agenda

Trade cancellations Key principles

The following principles will govern cancellations of bond ETP trades:

• Only cancellations on T will be allowed

• All trade cancellation requests must be sent to the JSE Market Regulation division (20min after trade execution) for approval prior to the cancellation being actioned

• Only the JSE will be able to action cancellation requests via the MTS trading system (if approved by JSE Market Regulation)

• Both trade legs will need to be in an uncommitted state prior to the cancellation being actioned – the cancellation action will be rejected if any of the trade legs are in committed state

• Trade cancellation requests that are not finalised before a predetermined cut-off time on T (6pm) will be subject to margin calls

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Cancellation process

39

PD JSE CSDP STRATE

T (Market Open) Start

Received cancellation from MTS

Contacts counterparty and does all necessary investigation to determine whether or not trade will be cancelled

Informs JSE Market Surveillance of error trade and gives necessary permissions

End

If cancellation approved

Inform PD that trade cancellation is approved

Informs CSDP that trade cancellation is approved and going to be processed

Yes

CSDP uncommits

No Requests CSDP uncommit

T (18h00)

Instructs MTS to cancel trade

Check that trade is in an uncommited status

Trade cancellation completed

MTS cancels


Background










Trade cancellations

Operational events (Rolling) and Business continuity 40

Agenda

Operational events

• Facilities have been made available by NT and SARB to provide scrip and funds respectively, to ensure settlement of ETP trades

• Notwithstanding this, there may be occasions where settlement may not be possible i.e. operational or default events

• The following operational events should be considered:

• Strate systems down – high settlement impact – entire market down, DR processes to be actioned

• CSDP(s) systems down – high settlement impact – DR processes to be actioned

• JSE systems down – no settlement impact

• PD systems down – no settlement impact

41

Rolling of trades will only be triggered once all other possible BCP/DR resolution steps have been exhausted. Choosing to roll trades will be agreed upon unanimously by all impacted

market participants during the crisis management process.

Rolling of ETP Trades

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PD JSE CSDP STRATE

When call made to roll Start

Notifies all impacted stakeholders (PDs, CSDPs and Strate) of the failing ETP trades will be rolled

Book trades as per JSE instruction NB: Trade Yield will be the same as originally executed on ETP

End

Assuming that rolling of trades has been agreed upon by the market

Inform PDs of trades to be booked in IRC market including trade economics. Settlement date will be determined by volume to be rolled

Confirm IRC Trades

New S

Confirm IRC Trades

Ensure that all ETP trades identified for rolling are uncommitted & stay uncommitted i.e. Rolled trades will fail

Confirm IRC Trades Confirm IRC Trades

Margin calculated if settlement date >- T+1

Trades committed to Trades settled

Business continuity End-to-end impact assessment work done

43

Business continuity End-to-end impact assessment work done

44 General end-to-end crisis management process to be updated and circulated to the

market for review

Top five scenarios to be tested

45

No. Scenario High-level resolution

1 Incorrect pricing on MTS Trade cancellation and rebooking of trades in IRC market

2 One or more CSDPs or Strate being down, or settlement timeline extensions being exhausted

Rolling of settlement via the IRC market

3 PD pricing engine errors resulting in bulk cancellations

Bulk cancellation via MTS and processing by Strate

4 Integration failures between MTS, Strate and (or) JSE

Replaying of messages from source systems and end-to-end reconciliation

5 Incorrect margin calculations Reference data\trade correction and rerunning and settlement of margins

Key functional and process capabilities

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• Counterparty name give-up in the event of rebooking in IRC market

• Next day trade cancellation as an equal and opposite trade in the IRC market

• Rolling of settlement by repricing and booking of a large number of trades in the IRC market via Nutron

• Bulk cancellations in MTS and processing at Strate and CSDPs

• Bulk uploads of corrected trades in margining system

• Replaying of trade and settlement messages from source to destination systems

• Ad-hoc end-to-end reconciliation across PDs, CSDPs, JSE and Strate

Rebooking of corrected or cancellation trades in the IRC market does required

significant coordination, resource effort (if manual) and end-to-end reconciliation across all market stakeholders

Thank you…

47

Please contact the JSE for any questions or further information that may be required:

JSE BONDS <[email protected]>

Additional project info may be found on the JSE website: https://www.jse.co.za/Pages/trade/debtmarket/BondETP.aspx

https://www.jse.co.za/Pages/trade/debtmarket/BondETP.aspx




Bond ETP - jse.co.za ETP... · • The JSE is responsible for managing the ETP Project delivery...

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