August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011August 19, 2011

Plan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP ServicesPlan for Provision of CCP Services

for OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivativesfor OTC Derivatives

Contents

ⅠⅠⅠⅠ. Global Overview

ⅡⅡⅡⅡ. Progress in Korea

ⅢⅢⅢⅢ. The Benefits and Process of Clearing by CCP

ⅣⅣⅣⅣ. Overview of Proposed CCP Services

ⅤⅤⅤⅤ. Activity Schedule

Ⅰ. Global Overview

GG--20 Pittsburg Agreement20 Pittsburg Agreement (`Sep, 2009)(`Sep, 2009)

All standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exAll standardized OTC derivative contracts should be traded on exchanges changes changes changes

or electronic trading platforms, where appropriateor electronic trading platforms, where appropriateor electronic trading platforms, where appropriateor electronic trading platforms, where appropriate, and , and , and , and cleared through cleared through cleared through cleared through

central countercentral countercentral countercentral counter----parties by endparties by endparties by endparties by end----2012 at the latest.2012 at the latest.2012 at the latest.2012 at the latest. OTC derivative OTC derivative OTC derivative OTC derivative

contracts should be reported to trade repositories.contracts should be reported to trade repositories.contracts should be reported to trade repositories.contracts should be reported to trade repositories. NonNonNonNon----centrally cleared centrally cleared centrally cleared centrally cleared

contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.contracts should be subject to higher capital requirements.

• USUSUSUS : Enactment of Dodd-Frank Act (July, 2010)

• JapanJapanJapanJapan : Amendment of Financial Instruments and Exchange Act (May, 2010)

• EuropeEuropeEuropeEurope : Preparation of European Market Infrastructure Regulation

1

JSCCJSCCJSCCJSCC (Japan)(Japan)(Japan)(Japan)

• CDS (July, 2011)

SGXSGXSGXSGX (Singapore)(Singapore)(Singapore)(Singapore)

• Commodities Deriv. (2006)

• FFA (2006)

• IRS (2010)

CME (US)CME (US)CME (US)CME (US)

• Commodities Deriv. (2002)

• CDS (2009)

• IRS (2010)

ICE ClearICE ClearICE ClearICE Clear (US)(US)(US)(US)

• Energy Deriv. (2007)

• CDS (2009)

LCH.ClearnetLCH.ClearnetLCH.ClearnetLCH.Clearnet (UK)(UK)(UK)(UK)

• IRS (1999)

• CDS (2010)

Eurex ClearingEurex ClearingEurex ClearingEurex Clearing (Germany)(Germany)(Germany)(Germany)

• CDS (2010)

IDCGIDCGIDCGIDCG (US)(US)(US)(US)

• IRS (2010)

Global CasesGlobal CasesGlobal CasesGlobal Cases

• Expanding services along with legislation

2

G20 Summit Agreement (Sep, 2009)

Ⅱ. Progress in Korea

Initiatives taken to introduce CCP service for OTC derivatives* To start voluntary clearing service of CCP

Operation of working group and commissioned the researches

• To introduce CCP services for standardized OTC derivatives by end-2012

* Higher capital requirements on non-centrally cleared contracts

Establishment of task force lead by FSC (Feb. ~ Jun.)

Public hearing on introduction of OTC market infra. (19, Nov.)

2007

2009

2010

Public hearing on upgrading of capital market infra. (4, Jul.)

2011The FSC had drafted a revision bill of the FSCMA, made public on July 27

※ FSC announced its plan to designate KRX as the CCP for OTC derivatives (26, Jul.) 3* FSCMA (the Financial Investment Services and Capital Markets Act)

Ⅲ. The Benefits and Process of Clearing by CCP

The Benefits of Clearing ServicesThe Benefits of Clearing ServicesThe Benefits of Clearing ServicesThe Benefits of Clearing Services

• Reducing settlement risk : Taking over counterparty risk and multilateral netting

* CCP takes over counterparty risk through novation

• Increasing Liquidities : Increasing trade volume due to mitigating counterparty risk

• Capital Incentives : Low credit exposure in Basel

• Reducing Operational Risk : Reducing the administrative burden as a result of

multilateral netting and streamlining settlement through CCP

Bilateral trading & clearing : $1,000bn Multilateral clearing by CCP : $200bn

AAAAAAAA

BBBBBBBB CCCCCCCC200mil.

300mil.200mil.

AAAAAAAA

BBBBBBBB CCCCCCCC

100mil.0 CCPCCPCCPCCPCCPCCPCCPCCPCCPCCPCCPCCP

DDDDDDDD300mil.100mil. 0 DDDDDDDD

4

Trade Execution

• Executed, either directly or via

an IDB

(Trade Confirmation)• Confirm the trade execution

through respective trade

registration platform

(KRX or other platforms)

Dealer BDealer A

IDB

Clearing Confirmation▽“Novation”▽

Netting▽

Settlement

Clearing participant A(Dealer A)

Clearing participant B(Dealer B)

1 11

2

2

2

3 4

4 4

Trade Confirmation

TradeTradeTradeTradeExecutionExecutionExecutionExecution

ClearingClearingClearingClearing

Clearing by CCP• Checking clearing eligibility

(Clearing confirmation)* Validation of trade for which the settlement

liability would be assumed by CCP• Novation, netting, settlement

and notice, etc* Reporting the clearing status to Clearing participants

Clearing ProcessClearing ProcessClearing ProcessClearing Process

TradeConfir-mation

5

* IDB : Inter-dealer Broker

Product to be covered by CCP services :Product to be covered by CCP services :Product to be covered by CCP services :Product to be covered by CCP services : Plain Vanilla Interest Rate Swap (KRW)

• IRSIRSIRSIRS(2012) ▶ CDSCDSCDSCDS ▶ FX FX FX FX (F/X Swap, CRS)

OTC Derivatives by Underlying Asset

Ⅳ. Overview of Proposed CCP Services

Extend service product in the long term

2,156(31%)

128(2%)

4,648(67%)

InterestRate

ForeignExchangeOthers Options(6%)

Forwards(1%)

Swaps(93%)

Contract Specifications

6

* notional amount outstanding, in KRW trillionas of Dec 2010

Structures• Plain Vanilla Swap* fixed-for-floating interest rate swap

Currency • Korean Won (KRW)

Index• 91 Days Certificate of Deposit Rate * Korea Financial Investment Association announcement

ContractAmount

• Up to 1 trillion KRW

Others

• Business Day Convention : “ Modified

Following” etc

• Day Count Fraction : “ Actual/365, etc

* Adjusted or Unadjusted by business day convention

A financial institution, that is not a clearing participant, is required to

entrust the clearing to a clearing participant

Indirectparticipant

ProprietaryProprietaryclearingclearing

ClearingClearingClearingClearingparticipantparticipantparticipantparticipant

CustomerCustomerclearingclearing

KRX(CCP)(CCP)(CCP)(CCP)

ProprietaryProprietaryclearingclearing

ClearingClearingClearingClearingparticipantparticipantparticipantparticipant

CustomerCustomerclearingclearing

Indirectparticipant

Entry into SettlementEntrustment Agreement

Entry into SettlementEntry into SettlementEntrustment AgreementEntrustment Agreement

7

Clearing Participants :Clearing Participants :Clearing Participants :Clearing Participants : Banks and Securities Firms

9

for OTC derivatives trade are able to directly participate in the service by becoming the KRX OTC clearing member

with the license

SafeguardsSafeguardsSafeguardsSafeguards

• Risk Management SystemRisk Management SystemRisk Management SystemRisk Management System : Issues related to OTC derivatives are incorporated

in the existing risk management system

• MarkMarkMarkMark----totototo----MarketMarketMarketMarket : : : : Marked-to-market for CCP trades using the clearing house’s

zero coupon yield curves

Margin Margin Margin Margin : To cover of price fluctuation

Clearing FundClearing FundClearing FundClearing Fund : To accumulate the fund for OTC derivatives

* Separate from other assets (securities/ derivatives)* Government bond can be used for accumulation

Settlement Reserve FundSettlement Reserve FundSettlement Reserve FundSettlement Reserve Fund : To use KRX’s own funds for default

(Used for all KRX markets)

Normal market

Extreme but

plausible

market

• Financial SafeguardFinancial SafeguardFinancial SafeguardFinancial Safeguard

8

* Cash and non-cash collateral (securities, etc.)

System Development PlanSystem Development PlanSystem Development PlanSystem Development Plan

(KRX or other systems)

청산결제시스템거래등록시스템

SecuritiesSecuritiesSecuritiesSecurities

DerivativesDerivativesDerivativesDerivatives

Clearing & Settlement System

Clearing Participant’sOwn System

Clearing & SettlementTerminal provided by KRX

(Dedicated Line)

<Notification of Clearing Status>

Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal

Provided by othersProvided by othersProvided by othersProvided by others

Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal Trade Registration Terminal

provided by KRXprovided by KRXprovided by KRXprovided by KRX

Clearing Confirmation

Netting

Novation

CheckingClearingEligibility

Trade Registration

(Public Line (Web))

KRXKRXKRXKRX Clearing ParticipantsClearing ParticipantsClearing ParticipantsClearing Participants

• To develop OTC derivatives clearing system and load it on theexisting clearing system of KRX

2

1

3

4

5

9

OTC OTC OTC OTC DerivativesDerivativesDerivativesDerivatives

Sending the matched trade

Reporting SystemReporting SystemReporting SystemReporting System

• To develop trade data management and reporting system for OTC derivatives

▶ Performing a role of Trade Repository of trades to be cleared

by CCP mandatory clearing transactions

Reporting System after Introduction of CCP Services

Financial Services Commission (FSC)Financial Services Commission (FSC)

CCPCCP

Trades to be clearedTrades to be cleared

Clearing

Reporting of trading details

10

Ⅴ. Activity Schedule

Target launch time :Target launch time :Target launch time :Target launch time : In the second half of 2012 In the second half of 2012 In the second half of 2012 In the second half of 2012 (July)(July)(July)(July)

Phase 2Phase 2Phase 2Phase 2Phase 1Phase 1Phase 1Phase 1 Phase 3Phase 3Phase 3Phase 3

Aug. Oct. Dec.Jan. Mar. April. Jun. Jul.

LacunchingLacunchingLacunchingLacunchingLacunchingLacunchingLacunchingLacunching

OfOfOfOfOfOfOfOf

ServiceServiceServiceServiceServiceServiceServiceService

To hold regular consultation meetings/ briefing sessions with relevant organizations

To draft rules & regulations

Trial operations

Public relations

Participation in consultation meetings

To updateparticipants’ systems

Interface test

Preparation for launch

To make Rules & Regulations by FSC’s review and approval

Systemdevelopment

System design

Preparation of system development plan

KRX

Participants(Banks/

Securities)

Revision

of the laws

Revision of the FSCMA

Revision of decree/regulation

11

Expansion of products

covered by CCP service

• IRS ▶ CDS ▶ FX

Mandatory trading requirements

Broadening of participant’s types

• Banks/Securities ▶ Trust/Insurance

Issues to be addressedIssues to be addressedIssues to be addressedIssues to be addressed

Establishment of clearing

link with foreign CCPs

12• Provision of CCP services for OTC

derivatives traded between Korean and overseas financial institutions

• Considering to mandate all standardized contracts to be traded on organized trading facilities