Bond ETP Market training: Settlement operations. June 2018

Transcription

1 Bond ETP Market training: Settlement operations June 2018

2 Session Structure Training session schedule: Date Settlement Operations Risk and Default Management Thu, 7 June :00 to 12:00 13:00 to 16:00 Mon, 11 June :00 to 12:00 13:00 to 16:00 Thu, 14 June :00 to 12:00 13:00 to 16:00 Session schedule: Session 1: Tea Break: Session 2: 09h00 to 10h15 10h15 to 10h45 10h45 to 12h00 2

3 Session objectives 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 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

4 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

5 Agenda Overview of 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) and business continuity 5

6 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 Q

7 Agenda Overview of 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) and business continuity 7

8 Bond Market Landscape New ETP trading platform IRC (Interest Rate and Currency) ETP (Electronic Trading Platform) OTC (Over The Counter) SLB Business Partner Strate Collateral Management Services Client Settling Bank CSDP Strate (CSD) NB. No changes to existing downstream systems Issuer/ Issuer Agent Foreign CSD SARB PASA NT

9 Agenda Overview of 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) and business continuity 9

10 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

11 Agenda Overview of 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) and business continuity 11

12 Settlement process flow 12

13 Settlement timelines and obligations Current IRC market S-2 S-1 S 8h00 10h00 12h00 14h00 16h00 18h00 10h00 12h00 14h00 16h00 18h00 10h00 12h00 14h00 16h00 /8h00 /8h00 18h00 /8h00 Settlement Instructions to CSDP (non-member)/member in position to settle 17h00 Allocations / principal assignments complete Ensure CSDP is in position to commit 18h00 CSDP commit 08h30 CSDP commit becomes unconditional Settlement Instructions to CSDP (non-member)/member in position to settle & ensure CSDP in position to commit CSDP commit 12h00 13h00 13h00 15h15 Exceptions handling processes T+3 trades T+2 trades T+1 trades T+0 trades 13 Members CSDPs

14 Settlement timelines and obligations ETP market T+1 (S-2) T+2 (S-1) T+3 (S) 8h00 10h00 12h00 14h00 16h00 18h00 /8h00 10h00 12h00 14h00 16h00 18h00 /8h00 10h00 12h00 14h00 16h00 18h00 /8h00 A B Ensure CSDP is in position to commit CSDP commit 18h00 CSDP commit becomes unconditional 08h30 Member obligations CSDP obligations Exceptions handling processes C 13h00 15h15 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. 14

15 Settlement timelines and obligations Exceptions handling process (13:00 to 15:15 on S) 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 Settlement administration for cover trades to be finalised by CSPD Final Strate settlement run SAMOS cutoff 15

16 Agenda Overview of 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) and business continuity 16

17 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: ETP IRC Off-market SLB ETP IRC Off market SLB 17

18 Back-to-back (BTB) linking process 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? N Is there a purchase transaction settling on or before the sale transaction? N Is there a SLB/Repo transaction settling on or before the sale transaction? N Leg remains uncommitted Y Y Y Commit Link and Commit Link and Commit 18

19 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

20 SCENARIO 2 SCENARIO 1 Back-to-back links and settlement groups ETP IRC OTC 1 Buy 1 PD Sale 1 PD2 BTB 1 CSDP1 Buy 2 PD Sale 2 CL1 2 Buy 3 PD Sale 3 PD3 BTB 2 CSDP2 Buy 4 PD Sale 4 CL2 3 Buy 5 PD Sale 5 PD5 In Scenario 1 the way in which links have been applied would create 3 different settlement groups ETP IRC OTC Buy 1 PD Sale 1 PD2 Buy 2 PD Sale 2 CL1 1 BTB 1 CSDP1 Buy 3 PD Sale 3 PD3 BTB 2 CSDP2 Buy 4 PD Sale 4 CL2 2 Buy 5 PD Sale 5 PD5 In Scenario 2 the inclusion of Buy 3 in BTB 1 creates one large group where there were previously 2 smaller ones 20

21 Agenda Overview of 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) and business continuity 21

22 Reconciliation of trade data for settlement MTS Trading Engine Trade info Trading Front End A Trade Recon 2 Trade Recon 1 JSE Trade Recon 3 Trade Vault Strate Settlement System (BaNCS) B Trade info CSDP Settlement Systems 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

23 Resolution in the case of recon misalignment Point of discrepancy Trade Recon 1 (MTS and Strate) Steps to be followed 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 23

24 Agenda Overview of 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) and business continuity 24

25 Daily settlement activities and associated reports Clearing and settlement activities on S JSE Settlement Authority monitors uncommited positions and works with members to have these committed before 13h00 Exceptions handling period 08h00 09h00 10h00 11h00 12h00 13h00 14h00 15h00 16h00 17h00 18h00 First Settlement Run (9h30) Final Settlement Run (15h15) 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 25

26 Daily settlement activities and associated reports Report Views Unstable BTB Link report (BP-ID_S0_UNSTABLE_BTB_Pivotview) ISIN CODE CTRCSDPBP CTRCSDPA CTRSCRIP SETTLEMENTPO COUNTER COUNTER COUNTERSETTLE COUNTERCLI NOMINAL SETTLEMENT COUNTER LOCKEDINREF TRADEACPTDATETIME LastUpdated TimeStamp ID CNO ACNO OLREF BTBREF TRADEREF MENTTYPE ENTTYPE VALUE DATE AFFISTATUS ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI ZAG R ZA RSA XDVP NAFI Uncommitted Trades Report (BP-ID_UNCM_ONMKT) 26

27 Daily settlement activities and associated reports Clearing and settlement activities on S JSE Settlement Authority monitors uncommited positions and works with members to have these committed before 13h00 Exceptions handling period 08h00 09h00 10h00 11h00 12h00 13h00 14h00 15h00 16h00 17h00 18h00 First Settlement Run (9h30) Final Settlement Run (15h15) SAMOS Cut-off (16h30) 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

28 Daily settlement activities and associated reports Report Views ETP Unstable Report IRC Unstable Report 28

29 Agenda Overview of 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) and business continuity 29

30 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

31 Exceptions handling processes: A Practical Example ETP IRC OTC Buy 1 PD Sale 1 PD3 BTB1 Buy 3 PD Sale 3 CL1 BTB2 Buy6 CL Sale 6 CL2 Buy 2 PD Sale 2 PD6 Buy 4 PD Sale 4 PD4 BTB3 Buy 5 PD Sale 5 PD5 Group 1 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) 31

32 Exceptions handling processes: A Practical Example Scenario 1: IRC trade holding up group ETP 3 PD to source cover IRC OTC Buy 1 PD Sale 1 PD3 Group 1 BTB1 broken 1 BTB1 Buy 3 PD Sale 3 CL1 Group 2 BTB2 Buy6 CL Sale 6 CL2 Buy 2 PD Sale 2 PD6 Buy 4 PD Sale 4 PD2 Group 3 2 CSDPs re-commit BTB3 Buy 5 PD Sale 5 PD5 Group 4 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 32

33 Exceptions handling processes: A Practical Example Scenario 2: OTC trade holding up group ETP 3 PD to source cover IRC 3 Client to source cover OTC Buy 1 PD Sale 1 PD3 BTB1 broken 1 Group 1 Group 2 Buy 3 PD Sale 3 CL1 BTB2 broken 1 Buy6 CL Sale 6 CL2 Group 3 Buy 2 PD Sale 2 PD6 Buy 4 PD Sale 4 PD2 Group 4 2 CSDPs re-commit BTB3 Buy 5 PD Sale 5 PD5 Group 5 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 33

34 Exceptions handling processes: A Practical Example Scenario 3: ETP trade holding up group ETP IRC OTC Buy 1 PD Sale 1 PD3 BTB1 Buy 3 PD Sale 3 CL1 BTB2 Buy6 CL Sale 6 CL2 Buy 2 PD Sale 2 PD6 Buy 4 PD Sale 4 PD4 BTB3 Buy 5 PD Sale 5 PD5 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 34

35 Settlement exceptions handling process Detailed process flow For discussion PDs JSE CSDPs STRATE T+3/S (01:00pm) Start Identifies trade (OTC or IRC) holding up ETP trade settlement T+3/S (01:15pm) Notified that trade needs to be covered Receives NAFI messages for newly uncommitted trades Breaks links related to ETP trades and sends notification to PD Sources cover If cover sourced before 02:00pm Requests window to book cover trade Opens window for cover trade to be booked Books cover trade Links cover trade to ETP trade and commits Continuation on next slide 35

36 Settlement exceptions handling process Detailed process flow (cont.) For discussion PD JSE CSDP STRATE If cover not sourced before 02:00pm T+3/S (02:00pm) Required to obtain cover from NT using facility in place Requests window to book cover trade with SARB Opens window for cover trade to be booked (via IRC market) T+3/S (03:30pm) Books cover trade Links cover trade to ETP trade and commits Final settlement run occurs End SAMOS payment window closed at 4:30pm 36

37 Agenda Overview of 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) and business continuity 37

38 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 38

39 Cancellation process PD JSE CSDP STRATE T (Market Open) Start Informs JSE Market Surveillance of error trade and gives necessary permissions Contacts counterparty and does all necessary investigation to determine whether or not trade will be cancelled If cancellation approved Informs CSDP that trade cancellation is approved and going to be processed Inform PD that trade cancellation is approved Instructs MTS to cancel trade MTS cancels Received cancellation from MTS CSDP uncommits No Requests CSDP uncommit Check that trade is in an uncommited status Yes Trade cancellation completed T (18h00) End 39

40 Agenda Overview of 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) and Business continuity 40

41 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 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. 41

42 Rolling of ETP Trades PD JSE CSDP STRATE When call made to roll Start Assuming that rolling of trades has been agreed upon by the market Book trades as per JSE instruction NB: Trade Yield will be the same as originally executed on ETP Notifies all impacted stakeholders (PDs, CSDPs and Strate) of the failing ETP trades will be rolled Inform PDs of trades to be booked in IRC market including trade economics. Settlement date will be determined by volume to be rolled Ensure that all ETP trades identified for rolling are uncommitted & stay uncommitted i.e. Rolled trades will fail Confirm IRC Trades Confirm IRC Trades Confirm IRC Trades Confirm IRC Trades Margin calculated if settlement date >- T+1 Trades committed to Trades settled New S End 42

43 Business continuity End-to-end impact assessment work done 43

44 Business continuity End-to-end impact assessment work done General end-to-end crisis management process to be updated and circulated to the market for review 44

45 Top five scenarios to be tested 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 45

46 Key functional and process capabilities 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 46

47 Thank you Please contact the JSE for any questions or further information that may be required: JSE BONDS Additional project info may be found on the JSE website: 47