Trading of classic repos at fixed and floating rate X-TRM Operating model

Transcription

1 Trading of classic repos at fixed and floating rate X-TRM Operating model 19th September 2017 Version

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3 Index Classic Repos 1.0 INTRODUCTION CLASSIC REPOS: MANAGEMENT INTO THE X-TRM SERVICE TRADING PLATFORMS X-TRM SERVICE SENDING OF CONTRACTS TO CCP AND CALCULATION OF BILATERAL NET BALANCES SETTLEMENT SYSTEM FLOATING RATE TRADING PLATFORMS X-TRM SERVICE SENDING OF CONTRACTS TO CCP AND CALCULATION OF BILATERAL NET BALANCES SETTLEMENT SYSTEM 10

4 1.0 INTRODUCTION The present document describes the functional requirements for the management of fixed and floating rate classic repos in the post-trading X-TRM service. These products, already common in other European government bond markets, represent for the Italian market the evolution of the actual money market, where only the Buy-Sell-Back is managed. Together with the changes that are closely related to the X-TRM service, this document even explains briefly technical and operational changes required to those actors involved into the value chain of the securities industry. 2.0 CLASSIC REPOS: MANAGEMENT INTO THE X-TRM SERVICE Classic repos are a type of alternative repos to Buy-Sell-Back (BSB). The main operational features of Classic repos, in addition to the legal ones, are the following: The countervalue of the forward leg is quantified by adding the tel-quel value of the spot leg to the repo interest, calculated by using the repo rate over the contract duration. differently from the BSBs, it s not computed the forward price, which is not consequently mentioned into the post-trading services operations. The forward value does not consider any coupon payments between the settlement date of the spot leg and the settlement date of the forward leg. Those amounts must be recognized by the buyer to the seller (of the spot leg) on the coupon payment date because, although the settlement of the spot leg determines the transfer of the financial instruments ownership from the seller to the buyer, the coupons must be recognized to the seller. The following paragraphs set out the functional requirements of the X-TRM service for the management of classic repos. Post-trading Service functionalities are closely related to those adopted by trading platforms and by the CCP, whereby the STP (Straight through processing) flow from trading to settlement is analyzed from a top-down view, as it is shown in Figure 1. 4

5 Trading platforms X-TRM CCPs SSSs Figure TRADING PLATFORMS Trading platforms connected to the X-TRM service dealing Classic repo must indicate, into the contract, the type of repurchase agreement. This allows X-TRM to process the contract and to perform the validation activities (verification of correctness of data sent) and enrichment (completion of the contract with post-trading data and calculation of the settlement values) according to the specific rules for the type of contract. The identified solution provides the introduction of a new "type of operation" (eg. PCR) that is specific for classic repos, while the source and the trading market remain unchanged. BSBs are identified with the operation type "PCT" both into the contract transmission flow from trading platforms and into the X-TRM service. According to this approach, trading platforms must submit the contracts to the X-TRM service, specifying a different operation type depending on the type of contract that is executed; X-TRM processes the trade basing on the specific arrangements of the classic and the BSB repo. 2.2 X-TRM SERVICE The X-TRM service identifies the type of repo and consequently performs the validation, the enrichment, the doubling and, in case of transactions that are guaranteed by the central counterparty (the CCP), the technical novation and the contract forwarding to the involved CCPs. Since classic repos will be identified by a new type of transaction, the information flow from X-TRM to CCPs and participants have been adjusted. The calculation carried out by X-TRM of the forward price, accrued interests and countervalues has to be modified consequently. The new financial formulas have been modified as following: 5

6 Spot Leg No changes are required to the current formulas used in X-TRM for BSBs. Forward Leg Since the forward value of repo contracts is determined without computing a forward price, the X-TRM will directly calculate the value using the following formula 1 : = + Where the repo interest is computed using the following formula: = The duration in days of the repo is quantified using the actual money market method, which can be ACT / 360 or ACT / 365, depending on the instruments. The instructions generated by the X-TRM service, related to the classic repo forward legs, do not show the forward price and the forward accruals, but they separately report the tel-quel value of the spot leg and the repo interest. Whenever between the Intended Settlement Date of the spot and forward leg there is a coupon payment, the day before payment date at end of day X-TRM automatically generates, upon receipt of the contract, a compensation on the security ISIN code, through which the spot buyer recognizes to the seller, on the coupon payment date, the amount of this latter, calculated using the following formula: = 1 The aim of this formula is to provide a rough indication of the calculation method, thus rounding and truncation have been deliberately omitted 6

7 The compensation is sent up to Target2-Securities. The management of the compensation differs between NO CCP NOT guaranteed and CCP guaranteed operations. Contracts not guaranteed by CCP The compensation created (one for each received classic repo) will be sent to the settlement system T2S. Contracts guaranteed by CCP The compensation created (one for each received classic) won t be sent to T2S, because such operations will be created as the original not sendable contracts; such compensations will be aggregated in a net bilateral balance separated from the net bilateral balance related to market trades since CCPs have chosen to use a distinct settlement account for the settlement of balances related to coupon payment. If CCP opted for using the same settlement account then there would be just one single they will contribute in the calculation of the net bilateral balance between the participant and the related CCP including both coupon payments and on exchange trades. The not sendable compensations, related to the coupon payment, areis sent also to CCP, since ithey contributes to the generation of bilateral balances. If the original contract is cancelled before the coupon payment date a, the compensation will not be createdpreviously created should be deleted. If the coupon payment already took place, it will be up to the single participants involved in the trade to insert a compensation adjustment. Note also that the creation of the compensation and its settlement is independent from the effective settlement both of the spot and of the forward legs. In order for participants to identify the instruction related to the coupon, the compensation is marked with the source CPA, with the same market source; besides for each CPA generated (both with reference to CCP not guaranteed and guaranteed) there is the field Market Id populated with the contract number to which the CPA refers. For the CPA not guaranteed the contract number is also reported in the field Trade Common Ref.. Whenever the coupon payment or the reimbursement of the financial instrument, underlying the repo, takes place between the intended settlement date and the expiration date of the settlement instruction, current rules of corporate actions will be applied. 7

8 2.3 SENDING OF CONTRACTS TO CCP AND CALCULATION OF BILATERAL NET BALANCES Classic repos are managed on the base of the interaction model among trading platform, X-TRM and CCP, currently in use for the BSBs 2 processing. The trade information flow from X-TRM to CCP has been adapted to allow the CCPs to identify the type of traded repo. Timing and mode to calculate the net balances have remained unchanged and, based on the same netting criteria, classic repos and BSBs are included into the same bilateral net balance with CCP. The compensations created by X-TRM, based on coupon payments, will be considered into the computation of the bilateral net balance. 2.4 SETTLEMENT SYSTEM No changes are required to the settlement service for the management of Classic repo. 3.0 FLOATING RATE Floating rate repos are classic repos that envisage, at the conclusion of the contract, a spread (positive or negative) on a pre-defined floating rate. This spread is determined after the negotiation. The most commonly used reference rate is the EONIA rate (Euro Overnight Index Average), which is daily published by BCE 3. Following paragraphs describe the operating model to manage these contracts. 3.1 TRADING PLATFORMS As trading platforms send floating rate repos to the X-TRM service, they have to report into the information flow the following specific information that differ from those required for the fixed rate repos: Fixed/floating rate repos This information allows the X-TRM service to distinguish between floating rate repos and fixed rate ones. The new message layouts have been modified to envisage an indicator that allows the distinction between floating rate and fixed rate repos. 2 Risk management functionalities of CCPs that might require some adjustments are not described by this document. 3 In this document, the EONIA rate is used as an example, bearing in mind that other reference rates may be used in the negotiation of floating rate repo. 8

9 Floating rate type This information allows X-TRM to identify the type of floating rate that has to be applied for the computation of the repo interest (eg. EONIA, SONIA, etc.). The message layout used by trading platforms has been modified introducing a field, which identifies the used floating rate type. Spread on the reference floating rate This provides the value in basis points, which has to be summed or subtracted to the floating rate, after the last reference rate is fixed. The value contained in this field is equal to the PCT rate in case of classic repo or BSB at fixed rate, and the spread value for floating rate repo. 3.2 X-TRM SERVICE Spot Leg The evaluation method used for floating rate repos is the same applied to BSBs and to the classic repos at fixed rate. Whereby, no changes are required to the current formulas that are applied into the X-TRM service. Forward Leg The value of the forward leg is calculated using the following formula, which is the same applied for classic repos at fixed rate: = + Where the repo interest is calculated using the following formula: = 9

10 The main difference stands into the way the repo rate is calculated. The applied formula is the following: = + i = number of days between the spot leg date (included) and the forward leg date N (excluded) Since the EONIA rate is published by the ECB around 19:00 CET, the value of the forward leg is computed through the following method: 1. Once received the trade from the trading venue, X-TRM calculates the spot leg value. At the same time, it defines the forward leg value by using the tel-quel value of the spot leg 2. Everyday, and in any case after the publication of the EONIA rate of that day, X-TRM computes, for the transactions with settlement date the following day, the final value of the forward leg floating rate repos, thus determining the real settlement value. 3. As soon as the EONIA rate is published, X-TRM updates, every day, the forward leg value of each contract. 4. For those forward contracts whose settlement date coincides with the following day, X-TRM updates all the forward legs and the bilateral net balances that are sent to T2S. To allow the above described processing, a X-TRM data base will store then all EONIA rates. 3.3 SENDING OF CONTRACTS TO CCP AND CALCULATION OF BILATERAL NET BALANCES Classic repos are managed with an interaction model between trading platform, X-TRM and CCP, which is the same currently used for the BSBs 4 processing. The flow of contracts that X-TRM sends to CCPs remains unchanged. 2.4 SETTLEMENT SYSTEM It is not required any change at the settlement system for the management of the floating rate classic repos. 4 Risk management functionalities of CCPs that might require some adjustments are not part of this document. 10

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12 Disclaimer The publication of this document does not represent solicitation, by Borsa Italiana S.p.A., of public saving and is not to be considered as a recommendation by Borsa Italiana as to the suitability of the investment, if any, herein described.this document has not to be considered complete and it is meant for information and discussion purposes only. Borsa Italiana accepts no liability, arising, without limitation to the generality of the foregoing, from inaccuracies and/or mistakes, for decisions and/or actions taken by any party based on this documents. Trademarks Cassa di Compensazione e Garanzia and CC&G are owned by Cassa di Compensazione e Garanzia S.p.A. Trademarks Monte Titoli, X-TRM and MT-X are owned by Monte Titoli S.p.A. London Stock Exchange, the coat of arms device and AIM are a registered trade mark of London Stock Exchange plc. The above trademarks and any other trademark owned by the London Stock Exchange Group cannot be used without express written consent by the Company having the ownership of the same. Borsa Italiana S.p.A. and its subsidiaries are subject to direction and coordination of London Stock Exchange Group Holdings (Italy) Ltd Italian branch. The Group promotes and offers the post-trading services of Cassa di Compensazione e Garanzia S.p.A. and Monte Titoli S.p.A. in an equitable, transparent and non-discriminatory manner and on the basis of criteria and procedure aimed at assuring interoperability, security and equal treatment among market infrastructures, to all subjects who so request and are qualified in accordance with national and community legislation, applicable rules and decisions of the competent Authorities. Contact Details Post Trade Sales E: pt.sales@lseg.com T: Monte Titoli S.p.A. Piazza degli Affari, Milano