Settlement at REPO market

As a clearing agency for the securities based on the Capital markets and Financial Investment Services Act, the KRX guarantees the performance of settlement in relation to REPO transaction and therefore, it plays a role as CCP (Central Counter Party) between sellers and buyers as far as the settlement is concerned.

Additionally, it provides each party concerned with buy-back service for agreement of non-repurchase after the execution of REPO trading (Tri-party Agent). Therefore, participants may participate in REPO market free from worry about settlement default.

item descriptions
Settlement & repurchase agency KRX (settlement guarantee)
the KRX
(settlement guarantee)
Settlement by netting after unifying trading repurchase & additional deposit on that day
Settlement method
  • Cash payment : transfer through BOK-wire based on data calculated/informed by the KRX
  • Securities delivery : transfer through Safe System of KSD based on data calculated/informed by the KRX
Time limit settlement
(on that day)
  • Trading on that day : trading day 16:30
  • Repurchase on that day : repurchase date 16:30
  • additional deposit : accrual day of deposit 16:30
Return of dividend

If dividend occurs from traded bonds during REPO trading period, the buyer should pay back the dividend concerned to the seller according to the contract.
Time of pay-back is the day of accrual in case of classic REPO adopted by the KRX and on the other hand, buyer returns it after deduction from repurchase amount in case of sell/buy-back.

Meantime, in most advanced countries withholding tax is not levied on financial income. Therefore, their procedures of dividend return are simple, however, the procedures in Korea who maintains withholding system on financial income are rather complicated in case of REPO trading, which results in restriction of trading.

Marking to market

Marking to market is a series of procedures to maintain collateral value on a proper level through collecting additional deposit after calculating risk exposure of one or the other party’s all agreement of non-repurchase with the same party in order to guarantee settlement performance of REPO trading by coping with price fluctuation of traded bonds every trading day.

In marking to market, there are such methods as direct execution method between parties, the one acted by Tri-party Agent and the other one executed by CCP (Central Counter Party), which is a new international trend.

For REPO trades executed in the KRX market, the KRX shall play a role of CCP for both parties and shall be responsible, as a repurchase agency, for marking to market and collecting additional deposit in case of being exposed to risk.

repurchase amount

This means the money to be paid to a buyer by a seller according to trading agreement and it is calculated as follows.

repurchase amount = trading amount * (1+repo rate *repo transaction periond/365)
Settlement by cash

Such a thing might happen that a person, who is to pay back trading bonds or maintenance margin security on repurchase date, meets an uncontrollable situation being unable to secure bonds due to lack of liquidity of object bonds in spite of his sufficient financial ability to pay.

As such it might be difficult for some of dealers to make bonds settlement and adverse affect of such settlement default might be widely spread if the situation is left without any measures so that the KRX, for the purpose of preventing the same situation, has a system of settlement by cash in place of settlement by bonds under the condition of imposing adequate penalty subject to agreement of both seller and buyer.

Rate of penalty is determined taking into account the premium required for purchasing the bonds concerned by the other party and market situation, etc.

Settlement at REPO market

REPO trading shall expire if repurchase date arrives. The contract expires on repurchase date in case of normal arrival of expiration but if any of following causes occurs either on trading bonds or on a party, then the date of the occurrence shall be the repurchase date for stabilization of REPO transactions and the contract shall be terminated earlier than the original date.

In case of settlement default by a party, however, all the contracts between the parties shall be able to be settled by cash. For the REPO trade executed in the KRX market, the KRX, as a CCP, shall pay, instead of paying party, the shortage of money resulting from cash settlement and exercise the claim for reimbursement against the defaulting party.

item descriptions
Normal repurchase Arrival of repurchase date
Early repurchase Finalization per trading
  • Refusal of exchange by a seller
  • delisting of trading bonds
  • earlier refund of principal & interest of trading bonds
Finalization of all agreements of non-repurchase (finalization as Single Agreement)
  • Settlement default by seller or buyer (including additional deposit)
  • suspension or ban from trading with banks due to dishonor of bill or check/suspension of business/bankruptcy, dissolution, application of rehabilitation or commencing de-facto rehabilitation according to laws