Overview Clearing and Settlement Risk Management Samir Jaradat

Overview Clearing and Settlement Risk Management Samir Jaradat CEO April 2009 Copyright © Securities Depository Center, Jordan. All Rights Reserved. 1

Delivery Versus Payment The Securities Depository Center (SDC) of Jordan implemented clearing and settlement on the basis of Delivery versus Payment (Dv. P) where delivery of sold securities is against payment of their value Dv. P is a global standard implemented in capital markets Copyright © Securities Depository Center, Jordan. All Rights Reserved. 2

Delivery Versus Payment Cycle Buy-In Electronic Trading File Clearing and Settlement T+0 Broker No The number of securities in the selling client’s account with the broker is sufficient to execute the trade according to Sub-Custodian instructions T+2 No Suspended Trade Removal of Suspension Causes T+1 Delivery of Sold Securities Versus Payment of their Value (DVP) Yes Liquidity Reserve Amount T+1 Accepted Trade T+2 Liquidity Reserve Account Settlement Amount (net to pay-Liquidity Reserve) T+2 Settlement Account T+2 Default Settlement Guarantee Fund Copyright © Securities Depository Center, Jordan. All Rights Reserved. T+2 3

Risk Management Settlement Guarantee Fund (SGF) SDC/ASE Tight Coupled Environment Suspend the value of suspended trades Buy-in & sell out measures Suspension of the defaulting broker from trading. Business Continuity & Disaster Recovery Plans Copyright © Securities Depository Center, Jordan. All Rights Reserved. 4

Settlement Guarantee Fund The Settlement Guarantee Fund was established by virtue of the Securities Law No. (76) of 2002. Its objectives include: 1. 2. Covering the cash deficit of a Fund member in connection with his purchases of securities Covering the deficits in the securities account of a Fund member The contributions of the members of the Fund are divided into cash contributions and bank guarantees. The contributions are calculated based on specific formulas and are periodically re-calculated Copyright © Securities Depository Center, Jordan. All Rights Reserved. 5

Settlement Bank · The Central Bank of Jordan is assigned as a settlement bank to receive/pay securities values, where all payments are processed through the "Real Time Gross Settlement System-Jordan" (RTGS-JO) · The SDC opened two accounts at the settlement bank: w Liquidity reserve account w Settlement account · The SDC is a member in the RTGS-JO central bank payment system Copyright © Securities Depository Center, Jordan. All Rights Reserved. 6

Tight Coupling Environment The Amman Stock Exchange (ASE) and the Securities Depository Center (SDC) implemented the ASE-SDC tight coupling on 22 March 2009 together with the new trading system in order to mitigate settlement risk Through the tight-coupled link, the order information is passed from the Trading system to the Depository System to ensure that the securities are indeed available prior to the trade being made Copyright © Securities Depository Center, Jordan. All Rights Reserved. 7

(Tight Coupling Environment) Copyright © Securities Depository Center, Jordan. All Rights Reserved. 8

Updating Daily Files Trading file SDC’s End of business day Sending File Updating FILES OF )ARAMIS( Updating CCM Files Trading Data files Copyright © Securities Depository Center, Jordan. All Rights Reserved. 9

(SDC-CCM) Files Transfer during trading session Adjust Accounts’ Ownership Balance Adjust Investors’ Status Adjust Brokers’ Credit Limit Adjust Broker’s Trading Cap Through (MMTP) Yes Bonds Custody Account Yes Custodian Notification Executed Transaction Shares transfer to custody account maintained at Broker level CUSTODIAN Copyright © Securities Depository Center, Jordan. All Rights Reserved. 10

Functional Objectives to the Tight-Coupled Link Trades orders verification: the aimed tight-coupling shall provide the facility to validate and check for each order the existence of investors with their respective available trading balances Trading-cap: maintain the sum amount of permitted selling trades to be executed by the broker to the maximum ceiling limit of their settlement guarantees Copyright © Securities Depository Center, Jordan. All Rights Reserved. 11

The advantages of the tight-coupled link Prevention of uncovered/ naked short sales Prevention of failure of delivery of securities Reinforcement of the concept of registered ownership Prevention of multiple selling orders where the same securities cannot be sold in the same trading session Control and monitoring of ownership percentage Control of financial obligations of broker participants Copyright © Securities Depository Center, Jordan. All Rights Reserved. 12

The advantages of the tight-coupled link ● Direct Online Verification for trading Orders w w w Percentage of securities ownership Accounts ownership except custodians Clients’ data Brokers’ data Approved trading unit Joint client ● Developing communication mechanism between capital market institution’s w w Reduce human interfering Dispense paper environment Apply secure environment Accuracy and Speed of achievement Copyright © Securities Depository Center, Jordan. All Rights Reserved. 13

Risk Management The implementation of the ASE-SDC coupled link is expected to reduce the settlement fails in the market by preventing naked short sales; thus having a 'Positive' impact on liquidity risk. The counterparty risk exposure will be also reduced through the monitoring of brokers’ trading-caps Copyright © Securities Depository Center, Jordan. All Rights Reserved. 14

Business Continuity & Disaster Recovery Plans Business Continuity: Maintaining access to data at all times, protecting critical business assets and reducing recovery costs based on business risk and information value Maintaining access to data at all times, protecting critical business assets and reducing recovery costs based on business risks and information value Copyright © Securities Depository Center, Jordan. All Rights Reserved. 15

Business Continuity & Disaster Recovery Plans The BCDR site should provide: · Accessibility ( for authorized personnel) · Security · Infrastructure (Network, electricity, etc) · Adequate distance form the Production Site, for protection form production site disasters. According to the international standards the distance of the DR site which is located in the north of the kingdom from the main site is (100) Km Copyright © Securities Depository Center, Jordan. All Rights Reserved. 16

Business Continuity & Disaster Recovery Plans BCDR Advantages Continuity of Business Operations International Standards’ Compliance Reduce the cost of Risk Management Security, Privacy & Data Protection Expertise and Skills Maintaining Market Readiness Copyright © Securities Depository Center, Jordan. All Rights Reserved. 17

Aspects of Business Continuity Copyright © Securities Depository Center, Jordan. All Rights Reserved. 18

Technology Platforms Securities Central Operation Registry Processing & Information Online ® Copyright © Securities Depository Center, Jordan. All Rights Reserved. 19

SCORPIO® System The SDC developed an electronic system called “SCORPIO®” consists of a number of support systems: Broker Support System Issuer Support System Sub-Custodian Support System Surveillance and auditing Support System Pledge Support System Services Support System Copyright © Securities Depository Center, Jordan. All Rights Reserved. 20

SCORPIO® System Functions ● Brokers’ System ● Issuer’ System ● Sub-Custodian System ● Pledgee System ● Registers System ● Clearing & Settlement System (Dv. P) ● Regulatory authorities Surveillance and Auditing System ● Reports System ● Auditing System ● Web Services System ● Settlement Surveillance ● Family Transfer ● Inheritance Transfer Copyright © Securities Depository Center, Jordan. All Rights Reserved. 21

SCORPIO® System Operations Copyright © Securities Depository Center, Jordan. All Rights Reserved. 22

Thank You www. sdc. com. jo Copyright © Securities Depository Center, Jordan. All Rights Reserved. 23