KELER was founded by the National Bank of Hungary, the Budapest Stock Exchange and the Budapest Commodity Exchange in 1993 with a depository and clearing house profile. It provides post-trade, custody and depository services to investment service providers, broker companies, banks and issuers. The clearing house performs risk-free, fast and effective settlement of transactions concluded by the market players. In 2009 the KELER was separated into two organizations, by this time KELER CCP Ltd. acts as central counterparty.
The functions of KELER and KELER CCP:
KELER CCP as a central counterparty guarantees the financial performance of both the cash and derivative transactions;
KELER as a clearing house runs the settlement of stock exchange and also OTC transactions;
KELER as a central depository executes the issue of securities codes and the central registration of securities, and keeps the central security accounts.
Clearing of cash market transactions
Clearing of transactions made in the equity section and in the debt security section (with the exception of fixed and auction transactions) is done in a rolling manner based on the principle of multilateral netting. The length of the settlement cycle is two days (T+2) in the equity section and also in the debt security section.
Settlement of standardised futures and option transactions
In the derivative and commodity sections, clearing is performed similarly to that in the equity and debt security sections, in a net manner based on the rolling principle. A characteristic of standardised exchange derivative transactions is the daily settlement of results achieved at each position.
In the case of single stock and interest rate based products, and most products in the commodity section, the settlement at expiration is performed by physical delivery. Some commodity products as well as all other derivative contracts are cash settled.
KELER CCP as a central counterparty
KELER CCP acts as a central counterparty both on the cash and derivatives market. It provides financial guarantee for the settlement of all guaranteed transactions. On the cash market KELER CCP ensures the financial performance for the positions resulting from the netting process where netted transactions are sent to KELER for settlement. With regards to the derivatives market KELER CCP – through novation – interposes itself between the seller and the buyer in each trade and becomes the buyer to each seller and the seller to each buyer.
The investment service provider can only take part in the trading of specific markets and sections if it has an arrangement for the clearing and settlement of its trades. This can be done in two ways:
the investment service provider becomes a clearing member in KELER CCP, or;
the investment service provider signs a clearing-membership contract with a clearing member and becomes a sub-clearing member.
A clearing-membership contract with KELER CCP can be signed by investment service providers and banks that comply with the requirements specified by KELER CCP and that constantly ensure the guarantee elements for clearing-membership.
Guarantee elements for clearing-membership
The basic financial cover is a fixed amount of money specified by KELER CCP for each market segment that should be maintained by the member trading on that market.
The variation margin is intended to cover past price movements for positions still open.
The initial margin is calculated based on open interests to the extent of the daily clearing spread as a fixed amount.
The function of the additional financial collateral is to allow KELER CCP to handle any increased risk to its members (e.g. due to extremely high open position).
Collective guarantee elements in settlement
The ESF (Exchange Settlement Fund) is a collective fund created to support the cash market. Its purpose is to reduce the risk arising from the delays or failures in performance of exchange transactions of clearing members amongst each other as a surety for a guarantee of the joint and several guarantors. ESF contribution is at the same time a surety to the extent of the claims of KELER CCP against the clearing-members.
The CGF (Collective Guarantee Fund) is a collective fund created to increase the security of the derivative market. Its purpose is to reduce the deficits arising from the delays or failures in payment undertakings associated with settlement of futures and option transactions as a surety for a guarantee of the joint and several guarantors. The CGF contribution and the reversionary amount is at the same time a surety to the extent of the claims of KELER CCP against the clearing-members.