Clearing and settlement of all stock exchange transactions are provided by Central Clearing House and Depository Zrt. (KELER).

Institutional background

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 seperated 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 execution 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 in the equity section is three days (T+3), while in the debt security section, it is two days (T+2).

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 Government Bond-based products, and products in the commodity section, the settlement at expiration is performed by physical delivery, while other financial contracts are cash settled.

KELER as central counterparty

KELER CCP acts as a central counterparty both in the cash and derivatives market. It makes a financial guarantee for the settlement of all transactions, and in the case of a possible default, it acts as a seller towards the buyer, and as a buyer towards the seller, thus guaranteeing the transactions accepted. If any of the parties do not perform their obligations, KELER CCP is able to take liability for obligations derived from the positions of the non-complying member even against its own capital.

Clearing-membership system

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 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.

More information: KELER and KELER CCP