CLEARING ACTIVITIES AND THE CCP

The introduction of the functions of the Central Counterparty in the exchange markets is inextricably linked with the clearing of transactions in financial instruments carried out by the Exchange on the basis of the respective license issued in 2012.

The Exchange carries out the clearing through multilateral netting of transactions concluded by clearing members, determines net claims and net obligations by the type of financial instrument, settles them in terms of money and provides information for securities settlements to the Central Securities Depository, as well as clearing on a gross basis, providing information on the claims and obligations to be performed on each transaction concluded to the Central Depository for the execution of settlements on money and securities. The Exchange carries out the clearing on a net basis in the foreign exchange, stock and derivatives markets and the clearing on a gross basis for certain instruments of the stock market.

KASE's clearing members are current members of the Exchange who meet requirements established for obtaining the status of a clearing member in a particular exchange market. In total, as of January 1, 2020, 29 members of the Exchange had the status of a clearing member in the foreign exchange market, 42 members of the Exchange had the status of a clearing member in the stock market, and 16 members of the exchange the status of a clearing member in the derivatives market.

By the beginning of the reporting year, KASE performed functions of the Central Counterparty in the foreign currency markets, including currency swap operations, and derivatives.

The availability of the Central Counterparty, which provides guarantees for the execution of transactions in the foreign exchange market, allowed expanding in 2019 of the range of traded instruments and opening of the trading in long-term swap transactions (from one week to one year). To implement this project, the Exchange carried out work to improve the risk management system in the foreign exchange market, developed mechanisms for calculating interest risks on foreign currencies, methods for determining the estimated forward prices for the US dollar and carried out respective improvements in automated systems of control of the adequacy of margin collateral for clearing members.

In order to ensure the stability of the operation of the default management, an agreement was reached with the National Bank of the Republic of Kazakhstan on the readiness to be a liquidity provider for forward transactions on the USD/KZT currency pair with the Exchange, as the Central Counterparty, within the limit requested by the Exchange. As a result, the risk management system in the foreign exchange market guarantees fulfillment of obligations to clearing participants on swap operations with terms of up to one year.

In addition, the Exchange signed service agreements on provision of liquidity in foreign currencies traded on the exchange market: on the yuan – with Commercial and Industrial Bank of China in Almaty (ICBC); on the Russian ruble and euro – with the Eurasian Development Bank (EABR); on euro – with Kaspi Bank. Under the agreements, ICBC, EABR and Kaspi Bank are ready to provide KASE with liquidity in the mentioned currencies to settle default situations in the foreign exchange market. The availability of liquidity providers on all foreign currencies traded on the exchange market significantly increases the reliability of KASE as the Central Counterparty for participants of the foreign exchange market and serves as an additional guarantee of the timeliness and completeness of settlements on exchange transactions, which is especially important in the context of the development of the foreign exchange market, increasing its liquidity and representativeness of market rates of currencies.

CCP ON THE STOCK MARKET

During 2019, KASE was preparing for the introduction of the new trading and clearing system on the stock market ASTS+ of the Moscow Exchange, as well as preparing for the launch of services of the Central Counterparty in the stock market.

While working on the project, large-scale work was carried out to change the Exchange's rules. Changes were made to 17 internal documents of the Exchange, three documents were revised, nine new documents were developed and put into effect.

With the launch of the CCP services on December 3, 2019 in the stock market, as part of the ASTS+ introduction, trading modes involving sale-purchase and repo transactions with the CCP were opened for shares, securities of investment funds with tenge settlements, as well as Eurobonds and global depositary receipts denominated in US dollars with settlements in US dollars. The functionality of the Central Counterparty is based on the use of single clearing on a net basis for transactions with securities traded in the regimes with the CCP, with settlements both in tenge and US dollars. The ASTS+ in real time calculates, records and monitors the adequacy of collateral for clearing members at the time when orders are submitted, which ensures high level of assurance of the fulfillment of obligations of the CCP on transactions concluded to clearing members.

Single clearing during clearing settlement sessions is carried out using the Settle CCP software module linked with the ASTS+, which is part of a single software complex that provides pre-trading, trading and post- trading operations.

Management and control of risks on transactions with the CCP is carried out by means of the software module International Risk Monitoring, which provides calculation and loading of risk parameters of financial instruments to control the adequacy of collateral for clearing members, as well as price limits when clearing members submit applications to the ASTS+.

As part of the launch of the CCP on the stock market and building of the risk management system, the Exchange, in order to manage market and liquidity risks, developed requirements for the reliability and liquidity of each financial instrument for which settlement obligations arise. The compliance of the financial instrument with the established requirements determines the condition for its inclusion in the list of instruments admitted to trading in the modes with partial collateral of obligations arising as a result of the trading. Financial instruments not included in this list are traded on a full prepayment basis (with full coverage).

RISK MANAGEMENT SYSTEM

As part of the efforts to introduce the CCP's risk management system on the stock market, elements of management and control of various types of risks were introduced.

In order to manage credit risk, depending on the financial condition of the clearing members and compliance of these members with requirements of the Exchange's internal documents, the categories of clearing members of the stock market were determined – "with partial security" and "with full security", which determine the method of securing the obligations of the clearing member controlled by the CCP.

in order to ensure the fulfillment of net obligations to clearing member, a methodology of settlement both at the expense of the Exchange's own funds and on account of transactions with bona fide clearing member carried out in the automated mode, has been developed.

The default settlement procedures are in line with international experience used by foreign clearing organizations.

The Fundamental Principles for Financial Market Infrastructures published by the IOSCO and the Committee on Payment and Settlement Systems on April 12, 2012, represent the basic system of principles for financial market infrastructures. These principles establish the rules that must be followed by organizations acting as central counterparties, trading repositories, central securities depositories, securities clearing and settlement systems, and payment systems.

Based on results of the self-assessment, the Exchange is considered as compliant with all fundamental principles for financial market infrastructures and is a modern clearing organization that aspires to provide world-class services to clearing members and their clients.

The IOSCO's "Fundamental Principles for Financial Indicators" of July 17, 2013 represent the basic system of principles for indicators used in financial markets. These principles establish the rules that must be followed by organizations – administrators of financial indicators, in the calculation and formation of financial indicators.

To bring in line with the principles for financial indicators, it is necessary to carry out additional work on making amendments to the rules and change the construction of the Exchange's business processes as an administrator of financial indicators.

ACCOMPANYING PROJECTS

As part of joint projects with the National Bank of the Republic of Kazakhstan on the introduction of the continuous and additional trading sessions on currency swap transactions in relation to the US dollar, amendments to the Rules of Execution of Settlements on Foreign Currency Trading regarding changes to the regulations on executing payments upon foreign currency trading have been developed and approved. The updated regulations determine the timeframes for clearing members and the Exchange to execute payments based on results of the additional trading session (6:30 pm ALT and 7:00 pm ALT, respectively), and for the convenience of clearing members, the deadline for payments by clearing participants to fulfill their obligations under margin requirements is extended to 7:00 pm ALT.

In the process of transferring trades in certain types of securities to the ASTS+ system and introducing the CCP on the stock market, a concept was developed for organizing such settlements by the Exchange, measures were taken to refine the Exchange's information systems and develop draft internal documents of the Exchange regulating the organization of trading, clearing and cash settlements, acting as the Central Counterparty in the stock market. A draft of the Exchange's new internal document called "Rules of Execution of Cash Settlements of Transactions with the Central Counterparty in the Stock Market" was developed.

In order to diversify KASE's correspondent network, on March 11, 2019, a new correspondent account of the Exchange in Russian rubles was opened at Eurasian Development Bank, in addition to the current correspondent account of the Exchange in Russian rubles with "Sberbank of Russia" (Moscow). This correspondent account of the Exchange has been successfully operating since April 2, 2019 for settlements of the exchange trading in the currency pair Russian ruble/tenge.