A new clearing member structure, AEX Securities Clearing (ASC), is to be introduced at the beginning of next year. It will control counterparty risk in securities transactions by direct connection and higher admission requirements for clearing members. The arrangements for managing risk in securities trading will also be tightened up, by the introduction of a system of margin deposits, daily settlement of price differences on open stock positions and the creation of a Clearing Fund.

This package of concrete proposals is set out in a paper which Amsterdam Exchanges has distributed to all its Seatholder banks and brokers. In the coming weeks these organisations will be considering whether they satisfy the admission requirements and control provisions and deciding on whether to enrol as a clearing member before the end of November.

The system used by AEX Options Clearing has been used as the model for the new system, but it too is to be reviewed at some stage in the coming year. The changed approach forms part of the ongoing process of modernisation of AEX Clearing & Depository, an Amsterdam Exchanges subsidiary, and is designed to support the integrity of the securities market.

Direct connection

As soon as the new structure is introduced, only the clearing members will directly connected to ASC. There will then only be a distinction between Direct Clearing Members (DCM) and General Clearing Members (GCM). A DCM may only act as clearing member for transactions executed by him on behalf of his clients or for his own account. A GCM, on the other hand, may also act as clearing member for other Amsterdam Exchanges Seatholders and their clients.

Capital requirements

Clearing members must provide sufficient financial guarantees to ensure that ASC can continue to settle transactions even in the most difficult situations. They also have to satisfy quality requirements relating to their knowledge and administrative organisation. A DCM must have a capital of at least Dfl 20mn, of which at least 50% must be equity capital. The remainder can be provided in the form of subordinated loans. The GCM must have a capital of at least Dfl 50mn, subject to the same restriction as for the DCM. For all clearing members the capital must be made up of assets that can be rapidly liquidated.

Refined risk management

As part of ASC's more finely tuned risk management, a system has been developed in which margin is calculated on the basis of a set percentage of the value of open stock positions. To ensure that ASC continues to meet its obligations even in disaster situation, these percentages must be 'crash resistant'. Besides individual guarantees in the form of margins, there will be a mutual guarantee arrangement for clearing members in the shape of a Clearing Fund. A call can only be made on this new-style Contingency Fund in the event of a disaster. The size of this fund must be sufficient to cover at least the price risk of the clearing member with the largest position, or rather the largest net balance of all open positions.

Counterparty risk

In a central order-driven market like AEX Stock Exchange, the management of counterparty risk is a matter of critical importance. In this kind of market the counterparty to a transaction is not known in advance (people want to be able to trade anonymously) and this can be one reason to avoid using such a market. At the moment that a securities transaction is offered for settlement, the relationship between buyer and seller is broken. It is therefore in the interest of market participants and the organisation of the market itself that a body like ASC immediately assumes the counterparty risk, acting as seller to the buyer and buyer to the seller. Since it takes over the positions, it guarantees both the original counterparties that all obligations arising out of the transaction will be met in full (delivery versus payment and payment versus delivery).

Current developments

There are two current developments which necessitate the coming change to the clearing member structure and the setting of special requirements. First, the merger of the two exchange organisations which led to the creation of Amsterdam Exchanges led to a wish on the part of the members to liquidate the Vereniging voor de Effectenhandel and to distribute its accumulated capital. Since 1963 ASC has been able to act as the body guaranteeing securities transactions, because of its position as part of the financial structure of the Vereniging voor de Effectenhandel. The necessary financial security that this provided in the form of a Contingency Fund, backed up by the capital of the Vereniging voor de Effectenhandel, is now to disappear. The second reason is the decision of the Ministry of Finance to avoid system risk by arranging for the Dutch Central Bank and the Securities Board of the Netherlands to set up a supervisory framework for the system used by Amsterdam Exchanges to settle securities transactions.

This proposed modernisation has been submitted for approval by the two supervisory bodies, the Dutch Central Bank and the Securities Board of the Netherlands. The names of the future clearing members will be made known in December. Amsterdam Exchanges still hopes to be able to introduce the new clearing member structure on 1 January 1998.

The paper is available from Amsterdam Exchanges Public Relations and Education Dept. on +31 20 550 4540.

For further information contact Raymond Salet, Amsterdam Exchanges AEX Amsterdam: 00 31 20 550 4433 or Paddy Manning, St James Corporate Communications London: 44 171 436 4101.

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