Settlement System
Centrální depozitář cenných papírů (Central Depository of
Securities, CDCP) provides participants of the Central
Securities Depository settlement system with the settlement
of
a) exchange trades;
b) OTC trades.
The settlement of security trades includes the following
two operations:
If both operations are completed within the defined time
limit of the settlement process, this is a model for the
delivery of securities against their payment, referred to as
“delivery versus payment”. Some transfers may be executed
via the Central Securities Depository in the form of a free
delivery of securities, referred to as “delivery free of
payment”. In these transactions, the Central Securities
Depository only assists with the transfer and delivery of
the securities; the relevant payment settlement is performed
outside the Central Securities Depository.
Individual settlement steps are documented in the Trade
Settlement Time Schedule, which is attached to the Rules of
the Settlement System of the Central Securities Depository
(Rules
& Regulations).
The Central Securities Depository carries out the
settlement of trades by debiting or crediting the accounts
of individual banks in the Czech National Bank Clearing
Centre; the Central Securities Depository enters the Czech
National Bank Clearing Centre as a “third party”.
From the perspective of financial settlement, we
distinguish two types of Central Securities Depository
participants:
| Participant -
clearing bank |
Czech or foreign banking institution with a banking
licence from the Czech National Bank.
The participant - clearing bank has a clearing account
established in the Czech National Bank Clearing Centre,
and the concluded trades are settled directly through
this account. The participant’s account is either
debited upon the settlement of the purchase of
securities or credited with the relevant amount upon the
settlement of the sale of securities. |
|
Non-banking participant |
Non-banking participant A Czech or foreign
participant of the settlement system of the Central
Securities Depository without a banking licence.
A non-banking participant does not have a clearing
account established in the Czech National Bank Clearing
Centre. The trades concluded by this type of participant
are settled via the clearing account of a selected bank.
On the basis of this contractual relationship, the bank
becomes the “clearing bank” for the non-banking
participant. The clearing bank’s account is debited or
credited as part of the settlement system; the bank is
informed in advance of the payment or collection of the
applicable financial amount. |
This concerns the transfer of the securities from the
seller to the buyer. The Central Securities Depository
settles the trades of both dematerialized and certificated
securities; however, most issues traded on the Exchange or
settled within the Central Securities Depository in the form
of OTC transactions are represented by dematerialized
securities.
The certificated securities traded and transferred among
the participants of the Central Securities Depository are
kept in the collective custody of the contractual depository
of the Central Securities Depository. The Central Securities
Depository keeps records of these securities on the asset
accounts of individual participants - divided into the
trader’s own securities registered on the account of a
Central Securities Depository participant and the securities
of its client registered on the settlement participant’s
client account in the Central Securities Depository or the
participant’s customer account.
As of the trade settlement date, the Central Securities
Depository carries out transfers from the sellers’ to the
buyers’ accounts.
Trading members enter their buying and selling orders /
instructions in the Exchange trading system; after the
registration of matched trades, these are transferred to the
Central Securities Depository for settlement.
Three types of trades can be concluded on the Exchange
prompt market:
- trades with the participation of market makers (SPAD);
- automatic trades (auction and continual regime);
- block trades.
Automatic trades and SPAD trades are concluded in the
Exchange system and are guaranteed, i.e. secured by the
Exchange Guarantee Fund. Within the Exchange system, block
trades are only registered and are not protected by
guarantees.
The settlement of all types of Exchange trades is carried
out in the form of “delivery versus payment” (DVP).
Trades with the Participation of Market Makers (SPAD)
The settlement of the trades concluded within the SPAD
system is irrevocable and guaranteed by the Exchange
Guarantee Fund (Garanční fond burzy, GFB) - Automatic Trades
Guarantee Fund and SPAD (FAS). As a general rule, settlement
is conducted on day S=T+3, where T is the trade conclusion
date and S is the settlement date. For SPAD trades not
concluded under standard conditions, the settlement date may
range from S=T+1 to T+15.
If any of the parties fails to comply with its obligation
arising from a concluded trade, it is provided with an extra
three-day period for the additional settlement of the trade.
If the trade is still not settled after this period, the
Central Securities Depository will cancel its settlement and
intermediate a substitute trade. The Central Securities
Depository will address all market makers to represent the
party which has caused the cancellation of the settlement in
the trade concerned. Upon the conclusion of a substitute
trade, the price difference, if any, between the original
and substitute trade shall be settled by the failing party
to the affected party.
The SPAD system is also used for the trading of futures,
where the daily settlement of profits and losses is carried
out on date T+1. The security of liabilities and the
coverage of risks arising from the settlement of exchange
trades involving futures are provided by the Derivative
Trading Guarantee Fund (FD).
Automatic Trades
The settlement of automatic trades is guaranteed by the
Central Securities Depository and conducted always on day
S=T+3. If the seller does not submit the securities by the
requested date or if the buyer does not pay for the
securities purchased, the Central Securities Depository will
secure the fulfilment of the obligation in place of the
debtor. The substitute delivery of securities is secured via
the mechanism of substitute trades, on the same principle as
in SPAD trades; the only difference is that with securities
not traded in SPAD, all trading members are invited to
conclude the substitute trade. The settlement of exchange
rate differences is calculated on the same principle as in
the event of a SPAD substitute trade, and is guaranteed by
the Fund of Guarantees for Automatic Trades and SPAD (FAS).
Block Trades
Block trades are settled on the day selected by the traders
involved, within the range of 0 to 15 accounting days
following the conclusion of the trade or the date of
matching in the Exchange trading system. The Central
Securities Depository does not guarantee the settlement of
block trades. If as of the settlement date the Central
Securities Depository participant does not submit the sold
securities or the buying participant does not pay the price
for the purchased securities, the trade settlement will be
suspended. Trades can be settled by a substitute date, up to
day S+6, incl. If the participant’s insolvency or inability
to submit the securities continues after this date, the
block trade is archived and the participants may submit a
written request to the Central Securities Depository for its
supplementary settlement.
Futures
Trading with futures is conducted with the involvement
of market makers, with the use of the SPAD trading system.
With the insertion of orders, the buyer’s and the seller’s
accounts are checked in order to guarantee the subsequent
transfer in the records, because futures trades cannot be
suspended.
The concluded futures are specified in the asset accounts of
the Central Securities Depository participants or the
authorized trading members, in a separate Central Securities
Depository record. The balances of futures contracts may
also be negative, which is the consequence of short
positions (sellers’ positions). The total sum of the
balances of the entire market in the given futures series
equals zero.
The settlement of futures includes futures registration,
daily settlement of profits and losses (mark to market
settlement) and the final settlement of the futures.
Following the end of each trading day, profits and losses
are calculated and subsequently settled based on the trades
concluded during the exchange day and from the open position
of the previous day. The final settlement on the maturity
day is conducted in the same manner as the daily settlement;
only the daily settlement price is replaced with the final
settlement price. The authorized trading members whose
trades and open positions have resulted in losses will
settle the amounts corresponding to the amount of such
losses. The authorized trading members whose trades and open
positions have resulted in profits will receive payments
corresponding to the amount of such profits.
As regards the settlement of futures contracts, risk
management is based on the elimination of credit risks by
guaranteeing the fulfilment of the obligations of
counterparties. Management instruments especially include
requirements regarding settlement participants, the daily
settlement of profits and losses, margin deposits, limits,
the guarantee fund and the position closing, where
necessary. Each authorized member is obliged to provide a
minimum margin deposit determined separately for market
makers and for members who are not market makers. The amount
of the trading member’s margin deposits determines the
amount of the inspection and sanction limit. Limits
applicable to authorized members are compared with their
daily profits and losses from concluded transactions, on a
continuous basis, as well as the open positions relating to
the current rate of futures contracts. Exceeding the
inspection limit by an authorized trading member is not
considered a breach of obligations. However, exceeding the
sanction limit constitutes a significant breach of
obligations, and the member concerned is obliged to
immediately close its positions.
Investment Certificates and Warrants
Non-leveraged investment certificates are classified as
investment securities, while leveraged investment
certificates and warrants are considered derivatives. A
system with a single specialist is used for the trading of
certificates and warrants; the specialist is obliged to
maintain listing and conclude trades during the entire
period of the open phase existence. Warrants may also be
traded within automatic trades.
The settlement of these products is not subject to risks
from the failure to meet obligations because the maximum
loss may only be incurred by the buyer, limited by the
amount of the purchase price.
OTC transactions, the settlement of which is secured by
the Central Securities Depository, include trades not
registered by the Exchange. Buyers and sellers may include
all Central Securities Depository participants that enter
trade settlement instruments in the system in a manner
similar to that of block trades.
The Central Securities Depository settles OTC
transactions in accordance with participants’ requests, in
the following two essential manners:
- as deliveries versus payments (DVP), i.e. the transfer
of securities for consideration, consisting of financial
settlement and the submission of the securities, or
- as deliveries free of payment (DFP), i.e. just the
transfer of securities, where the transfer of money is not
executed via the CSD.
OTC transactions include:
- all trades concluded between two Central Securities
Depository participants that are not trading members of
the Exchange;
- non-business trades such as custody transfers,
security loans, repo-transactions or buy-sell transactions
between two Central Securities Depository participants;
- technical transfers – transfers between two accounts
kept by a single owner of securities.
The Central Securities Depository does not guarantee the
settlement of OTC trades; however, this represents the easy
and safe transfer of money and securities traded within the
OTC market. Central Securities Depository participants have
access to updated information regarding the instruction
status and are able to operatively remedy errors in their
instructions until the settlement date or to settle their
trades on a substitute date.
Settlement days are chosen by the trade counterparties
from within the following ranges:
- T+0 to T+15, or T+99 in repo transactions, security
loans and buy-sell transactions. As regards settlement in
the form of a free delivery of securities (DFP), the
settlement day may be identical to the instruction day,
i.e. starting on S=T+0.
- T+16 to T+99 as regards the settlement of transfers
with postponed settlement.
The settlement runs in four settlement cycles during a
single account day, i.e.:
- Morning settlement cycle (8am)
- Late morning DVP cycle (11am)
- Early afternoon DVP cycle (12:30pm)
- Afternoon DFP cycle (4:15pm)
Management of Risks Associated with the Settlement of
Investment Instrument Trades
Administration and Management of Participants’
Deposits in the Exchange Guarantee Fund
The mission of the Exchange Guarantee Fund (Garanční fond
burzy - GFB) is to secure the payable debts from Central
Securities Depository participants and to cover the risks
arising from Exchange guaranteed trades. The Exchange
Guarantee Fund consists of two funds:
- Guarantee Fund for Automatic Trades and SPAD (FAS)
- Derivative Trading Guarantee Fund (FD)
The resources in these funds are registered by Central
Securities Depository separately, and the use of the funds
is regulated by the Exchange Guarantee Fund Rules
(gfb_prav.pdf). The Guarantee Fund is an association of
trading members established on the basis of an Agreement on
the Exchange Guarantee Fund Association. Participation in
the Guarantee Fund is required for the granting of
permission to conduct trades on the Exchange.
Resources of the Exchange Guarantee Fund are contributed by
participants; the minimum amount of each participant’s
deposits within individual funds under the Exchange
Guarantee Fund is determined by the Exchange Chamber. The
participants’ property contributions to FAS and FD are
re-calculated on a daily basis. As regards FAS, the amount
of the property contribution is determined on the basis of
the exchange rate differences of automatic trades and trades
in SPAD; as regards FD, the amount of the contribution is
based on the total value of daily settlements over a
specific number of days.
If a participant is unable to fulfil its obligations, other
participants shall contribute the missing amount to the
relevant Exchange Guarantee Fund in proportion to their own
deposits.
The Central Securities Depository is responsible for the
administration and management of participants’ deposits in
accordance with the Exchange Guarantee Fund Rules. In
accordance with the resolution of the Council of the
Exchange Guarantee Fund, acting as the association’s
executive body, the Central Securities Depository invests
the amounts contributed to the Exchange Guarantee Fund in
the financial market. The resources from the Exchange
Guarantee Fund may be used if any of the exchange trade
participants default on the fulfilment of their obligation
arising from the trade and where no alternative solution can
be found for the fulfilment of the liability concerned. If
the buyer is insolvent, the Central Securities Depository
will settle the amount owed to the creditor’s account from
the Exchange Guarantee Fund resources. If the seller
defaults, the Central Securities Depository will organize a
substitute trade for the automatic trade or trade concluded
in SPAD and the subsequent delivery of the relevant
securities to the buyer. As regards a delay in payment
concerning the daily settlement of the price changes of
futures or the final settlement of futures, the missing
amount will first be compensated from margin deposits, and -
after their withdrawal - from FD resources.