< Default Handling Procedures for OTC Derivatives >
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- Judgement of a Default and Public Notice
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- Decision of a default
- When a clearing member fails to fulfill its settlement obligation or deposit its margin or when there is such likelihood, the KRX regards such a situation as default. The possibility of default is decided through a comprehensive review of all the circumstances including the situation of the default member concerned and the market.
- Public notice
- The KRX makes notice of the occurrence of the default to the default member, all clearing members, supervisory organizations, organizations related to clearing and settlement business.
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- Calling a meeting of the Default Management Committee
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- Operation of the Default Management Committee
- The Default Management Committee (DMC) comprises 7 members including experts from the KRX and clearing members. The DMC is in charge of efficient disposal of unsettled positions, prompt and accurate understanding of market situation, classification of unsettled positions, transactions to avoid loss (hedging), auctions, etc. in case of a certain clearing member’s default.
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- Measures against the Default Member
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- Measures against the default member
- In case of a clearing member’s default, the KRX may take such actions as suspension of clearing participation, in whole or in part, of the default member, restriction of application for obligation assumption, suspension of payment of net settlement cash or clearing margin to be received from the Exchange, and other measures as provided in the Enforcement Rules.
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- Classification of Default Member’s Positions
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- Classification of default member’s positions
- The KRX classifies, jointly with the DMC, the positions of the default member for effective risk management and mitigation, smooth operation of hedging transactions and auctions.
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- Transfer of Clearing Customer’s Position
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- Implementation of Hedging Transactions
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- Implementation of hedging transactions to avoid loss
- The KRX implements hedging transactions under its account with other clearing members to eliminate or reduce the possible loss from the positions of the default member. The hedging transactions are implemented against the proprietary positions of the default member and the customers’ positions not transferred to other clearing members.
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- Auctions on Default Positions
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- Auctions on default positions
- It is needed for the KRX, as the CCP, to minimize the loss risk by rapidly disposing the positions concerned in case of a default. As the OTC derivatives, however, do not have a market where offsetting transactions can be done at a fair price, auctions are needed. As the disposal of the default position delays, the loss grows more. As such, speedy and smooth auctioneering is the key element in managing the default. Clearing members should take part in the auctions in a sincere manner. Clearing clients may take part in the auctions by entrusting to a clearing member.
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- Close-out Netting
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- Implementing close-out netting when deemed necessary
- To minimize the additional loss to the clearing member and to prevent the default risk in the OTC derivatives from spreading to the exchange market, the KRX may convene a general meeting of clearing members at which a resolution on the close-out netting of the OTC derivatives can be made to prevent the bankruptcy of the KRX.
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- Follow-up Measures