Settlement resources are the financial resources accumulated with and kept by the CCP to cope with a settlement default by a clearing member and thus prevent the effect of the default from spreading to other members and the market. As such, the resources are prepared for a failure of settlement by a member and also for the extreme market risk
Composition of Settlement Resources
The KRX prepares settlement resources, as the clearing organization, in case of a default in the OTC derivatives transactions. Settlement resources include margin, OTC Derivatives Joint Compensation Fund, Settlement Reserves, and additional contribution of members. Unlike the exchange securities and derivatives markets, for the OTC derivatives, there are additional settlement resources such as additional contribution of members and collection of net settlement cash payment of members. Also, the settlement reserve, the CCP’s own financial resource, is used first prior to the use of the Joint Compensation Fund contributed by non-default members, which is systematically designed to enhance the CCP’s risk management.
OTC Derivatives Joint Compensation Fund
OTC Derivatives Joint Compensation Fund (JCF) refers to the JCF reserved at the exchange to compensate the loss from the default in settlement of the OTC transactions. Clearing members are obligated to jointly contribute to the OTC Derivatives JCF at the Exchange.
The amount of the JCF to be contributed by clearing members is the sum of the Basic Contribution and the Intermittent Contribution. To determine the amount of the JCF for each month, the KRX supposes an extreme situation where the two biggest clearing members are in default, and additionally collects the difference between such a new amount calculated each month and the already contributed amount from clearing members.
Clearing members are allowed to make the contribution with cash, KTBs and MSBs listed on the KOSPI Market. The whole amount may be paid by substitute securities only as there is no cash contribution requirement.
Settlement reserves refers to the reserves within the Exchange held for the compensation for the default loss which surpasses the amount of the default member’s assets and the OTC Derivatives Joint Compensation Fund. Currently the reserve amounts to KRW 50 bil., of which KRW 25 bil. shall be used prior to other non-default members’ contributions to the Joint Compensation Fund when a default occurs.
Additional contribution by members
If the loss is too much to be covered by the OTC Derivatives JCF and the Settlement Reserves, the non-default members are required to make additional contributions. The amount of this additional contribution is the amount corresponding to the required OTC Derivatives JCF amount calculated and informed to the members the last time before the commencement of the cap period.