The basic aim of derivative market clearing is to make sure that the daily variation margin of the transaction traded and accepted for clearing and the related transactions with physical delivery are settled fully. To this end KELER CCP operates a clearing membership and guarantee system.
On the derivative market three types of default can be differentiated:
- financial default
- default on securities delivery (‘FISZER’ trade)
- physical commodities default
Financial default occurs if the Clearing Member fails to meet the margin, default fund contribution, daily variation margin requirement or the financial settlement requirement related to a trade with physical delivery by the applicable deadline.
Once default is established KELER CCP takes steps without delay to suspend the trading right of the defaulting Clearing Member, and starts to take the available collaterals in line with the default waterfall stated in the General Business Rules. The default waterfall pays particular attention to segregation, as a result the client collaterals cannot be used in case of default in the own account of the Clearing Member.
The collaterals of the individually segregated clients are fully protected in case of default by the Clearing Member or its clients; as such instruments can only be used if the client concerned is in default.
Securities delivery default occurs if the Clearing Member fails to meet the securities settlement requirement arising from the securities transaction with delivery by the applicable deadline.
Upon default on securities KELER CCP attempts to acquire the missing securities in compulsory buy-in; if it is successful it settles with the non-defaulting buyer. The process of compulsory buy-in is identical to the practice followed in the case of securities transactions with multinet settlement. Financial settlement takes place if the buy-in is unsuccessful.
For commodities transaction with physical settlement KELER CCP guarantees settlement only if settlement is with warehouse warrants. In case of warehouse warrant default KELER CCP follows the rules of two-round delivery drawing, thus if the seller is in default it transfers back the purchase price margin made by the buyer to the non-defaulting Clearing Member.
Once default is closed KELER CCP calculates and collects the default fees.