Jurisdiction(s) in which the FMI Operates: Authority ... for... · KPEI is owned entirely by PT...

2 PT KLIRING PENJAMINAN EFEK INDONESIA

Responding Institution: PT Kliring Penjaminan Efek Indonesia Jurisdiction(s) in which the FMI Operates: Republic of Indonesia Authority Regulating, Supervising or Overseeing the FMI: Indonesia Financial Services Authorities The date of this disclosure is December 2015. This disclosure can be found at http://www. kpei.co.id/page/iosco-pfmi. For further information, please contact our hotline at +62-21 515 5115 or 0800-100-KPEI (5734)


I. Executive Summary PT Kliring Penjaminan Efek Indonesia (KPEI) was established based upon the Capital Market Law No. 8/1995 to provide orderly, fair, and efficient clearing services and transaction settlement guarantee. KPEI was established as a limited liability company by the Deed of Establishment No. 8 on August 5th, 1995, in Jakarta. KPEI is owned entirely by PT Bursa Efek Indonesia, the national regulated exchange, as manifested by the total shares valued at Rp15 billion. KPEI was granted the status of the legal entity on September 24th, 1996, an action made legal by the Ministry of Justice of the Republic of Indonesia. Two years afterwards, on June 1st, 1998, the corporation was granted its commercial permit to operate as a Clearing and Guarantee Institution, based on the Bapepam Decision Letter No. Kep-26/PM/1998. PT Kliring Penjaminan Efek Indonesia is a self-regulatory organization (SRO), and plays a central role in shaping the direction of Indonesian capital market development. As a Central Counterparty (CCP) to trade transactions, KPEI provides for clearing and guarantee services of stock exchange transactions settlement. KPEI functions to improve efficiency and provide certainty for trade transactions settlement for bargains on Indonesia Stock Exchange (IDX). KPEI performs clearing process to determine clearing members’ (CMs) rights and obligations in terms of securities and/or cash which must be settled on settlement date. As a CCP, KPEI is the only seller for every buyer and the only buyer for every seller for every transaction settlement over every investment instrument that is traded in the stock exchange. This is possible by means of netting clearing process through novation. As a Clearing and Guarantee institution, KPEI provides services that mitigate any counterparty risk that might arise from stock exchange transactions settlement.

II. Summary of Major Changes since the Last Update of the Disclosure This is KPEI’s first PFMI disclosure document.

III. General Background on KPEI General Description of KPEI and the Markets It Serves On August 5th, 1996, the Jakarta Stock Exchange (JSX) and Surabaya Stock Exchange (SSX) established Indonesia Clearing Guarantee Corporation named PT Kliring Penjaminan Efek Indonesia (KPEI) with shareholdings of 90% and 10%, respectively, and paid-up capital of Rp15 billion. KPEI then registered as legal entity, confirmed by the ratification from the Minister of Justice of the Republic of Indonesia on September 24th, 1996. On June 1st, 1998, the Supervisory Agency of Capital Market (Bapepam) officially published the Operational Permit for KPEI as Clearing and Guarantee Institution (LKP) by Decree No: Kep

http://www.ojk.go.id/en/law-no-8-of-1995-on-capital-market



26/PM/1998. Following the merger of JSX and SSX to be incorporated to Indonesia Stock Exchange (IDX), thus the 100% shareholding of KPEI is owned by IDX. KPEI’s role in the capital market industry is to conduct clearing and guarantee function of the securities transaction settlement. The clearing process is carried out to determine that every Clearing Member (CM) understands their rights and obligations to be completed on the settlement date. While the guarantee function in completing the securities transaction is to ensure the fulfillment of CM’s rights and obligations occurred from the transaction. Indonesia Capital Market Structure

Picture 1. Organizational Structure

Picture 1. Indonesia Capital Market Structure

Governance Structure of KPEI KPEI is governed by its board of directors and board of supervisors, a two-level oversight structure inherited from Dutch colonial days. The authorizations and responsibilities of both bodies are documented. The overseers of KPEI come from the exchange, private sector and public bodies, assuring that the direction of the infrastructure meets both commercial and public good requirements. Exchange groups have that dual function, and this is embedded in the governance set-up. These persons bring diverse experience to the tasks before these bodies, and they are properly vetted. When required, these bodies can elect to take advice from outside experts. They are held liable for their decisions in overseeing KPEI. Meetings are held monthly in Jakarta, and directors’ performance is evaluated. Questions of business risk and development are aired. In conducting its supervisory functions, the Board of Commissioners is assisted by the Audit Committee to encourage the sound Company management in line with the CG principles. In performing its duties, the Audit Committee works closely with the Board of Directors, Credit Policy and Risk Management Committee, Internal Audit and External Auditors.


The audit committee reports directly to the board, not to senior management of KPEI. The roles and responsibilities of the management team are defined. The chief executive officer position is separated from that of the chairman.

To enhance the accountability and the responsibility of every Company operations plan, as well as to assist the Board of Directors in decision-making process, the Board of Directors established the committees with specific duties and authority, which are responsible to the Board of Directors. These committees include Credit Policy and Risk Control, Haircut Committee, and Investment Committee. Product Coverage

Stock Exchange Transaction Clearing and Settlement Services Clearing process is the process of determining the rights and obligations of Clearing Member (CM) that occurred from exchange transactions conducted in Indonesia Stock Exchange (IDX). Results of clearing activities is Clearing Result List (CRL). This CRL will be sent to CM as a receivable upon the carried out transactions and must be settled within the settlement period. Each of securities products has different methods of clearing and settlement period. Clearing and settlement services based on type of transaction was explained as follows:

a. Clearing and Settlement of Stock Transaction

There are two methods of clearing for stock transactions namely netting and per-transaction. These applications of two methods were distinguished by the type of market. Netting method was intended for stock transactions in regular and cash market, in which regular market had settlement period of up to 3 trading days upon time of transaction (T+3) and cash market had settlement period on the same day of trading day (T+0). While per-transaction method is used for stock transactions in negotiable market whose settlement period had up to 3 trading days upon time of transaction (T+3). Implementation of Straight Through Processing mechanism since 2012 has enabled the process of stock transactions clearing and settlement can be executed up to client level. KPEI utilize a web-based system called the Electronic Clearing and Guarantee System (e-CLEARS) to conduct all process of stock transactions clearing and settlement.

b. Clearing and Settlement of Derivative Transactions The derivative product which can be transacted in IDX are Index Futures (KBIE) and Stock Options (KOS). Clearing and settlement of both products transaction currently were conducted by involving Payment Bank up to the CM level. Clearing for derivative transactions carried out by netting method. Derivative transactions was conducted in regular market with settlement period up to 1 trading day from the transaction day (T+1). Clearing of derivative transactions was processed with Risk Monitoring Online (RMOL) system and its settlement was processed using Cash Management (CM) system. Both systems worked through desktop based technology.

c. Clearing and Settlement of Bonds Transactions KPEI strongly support bonds trading and transactions conducted by IDX. There were two types of market provided for bonds transactions, namely regular market with settlement period up to 2 trading days from the day of transaction (T+2) and negotiable market with settlement period of 1 to 7 trading days from the day of transaction (T+1 to T+7). Clearing for bonds is conducted by a


system named Electronic Bonds Clearing and Guarantee System (e-BOCS), for both netting and per-transaction method. In addition, the system was also used related to confirmation and affirmation of settlement process, as well as the tax administration.

Guarantee and Risk Management Services KPEI’s guarantee function mean to provide assurance of CM rights and obligations that occurred from exchange transactions. Provisions regarding Exchange Transaction Settlement Guarantee experienced an improvement in 2014, in which protected by OJK Regulation No. 26/POJK.04/2014 regarding the Exchange Transaction Settlement Guarantee. In performing this function, KPEI employ systems and tools of risk control, named by e-CLEARS and risk management system called RAZOR. Through a proper and prudent implementation of risk management principles, KPEI look forward to provide best, safe and attractive service thus increasing confidence of the investors upon the Indonesian capital market.

Securities Borrowing and Lending Services Basically, Securities Borrowing and Lending (SBL) is to shift (lending) temporary rights of use on securities from lenders to borrowers in a certain period. This facility provide benefits for its users, including assistance in fulfilling the needs of securities handover in exchange transaction’s settlement, as well as in supporting transaction strategy of short selling, margin trading, and as additional income for long-term investment. The transaction process up to the settlement of SBL products is conducted using e-CLEARS system and Front End SBL applications.

Collateral Management Services KPEI provide collateral management services in the form of cash and stock owned by the CM and its clients. The collateral from CM, managed by KPEI as the collateral upon the liability of Exchange Transaction Settlement either for CM or CM’s client. Meanwhile the collateral placed by CM’s client is as the guarantee upon the liability of Exchange Transaction Settlement from CM’s clients. Collateral consists of Online Collateral, which is stored in the collateral account, recorded electronically namely cash, stocks, bonds, and Offline Collateral which come in the form of bank guarantees, deposits, certificates of Bank Indonesia, the minimum cash funds, and stock exchanges. The total value of offline collateral and online collateral is used as base of the calculation of trading limit from each CM.

Information Services

a. Member Interface (MI) MI helped CM to obtain a comprehensive and integrated information related to the CM’s activities, in alignment with KPEI’s function to conduct the stock exchange transactions clearing and settlement. MI application was developed based on flow process of Straight Through Processing (STP).

b. Mobile Clearing and Guarantee System (m-CLEARS) m-CLEARS was short message service delivered to mobile phone regarding various information of clearing and guarantee. m-CLEARS services can be obtained in Alert mode or On Request mode. The client can set the options accordingly to their needs.

http://www.ojk.go.id/en/fsa-regulation-securities-exchange-transaction-sattlement-guarantee


Customer Care KPEI Customer Care KPEI is a one-stop service that provides information regarding KPEI’s products and services, as well as to provide answer to a questions, to receive feedback, and complaints from by users and also stakeholders.

Participants of KPEI KPEI has only one participant, namely Clearing Member (CM). At the end of 2014, there were 109 active members and 8 suspended members. Risk Management Framework The risks that KPEI faces include liquidity risk, counterparty risk, as well as reputational, operational, legal, and general business risks. Most of these risks are identified, assessed, managed under the Enterprise Risk Management Framework. Counterparty risk management relating to clearing members is handled by the Risk Management Division. The risk management framework is reviewed every year. Both positive and negative incentives are in place to encourage clearing members to contain the risks they pose to KPEI. The e-CLEARS system and the Member Interface provide clearing members with comprehensive information to enable them to monitor and manage their own credit and liquidity risks. KPEI closely monitors its own liquidity reserves and financial strength, and has controls and procedures in place, as well as disaster recovery and business continuity plans, to manage its own operational risk. Exposures to clearing members are managed by collecting margin deposits prior to trade execution, requiring NAWC daily maintenance and reporting, and adjusting the trading limit. Business continuity plans have been established to cope with scenarios that may potentially prevent the organization from providing its core services. A resolution plan is still to be developed. Operational Reliability KPEI, as a CCP has primary operational objectives to provide via e-CLEARS, its clearing and services on each business day as scheduled and to ensure that system recovery can be achieved within two hours following a disruption to KPEI’s critical functions, under specific contingency scenarios. Legal and Regulatory Framework The clear and well-founded legal bases of a market infrastructure institution are critical, and should have a heavy weighting in a CPMI-IOSCO self-assessment. Law is fundamental for securities markets. For KPEI, law and presidential decree have the highest position in terms of relevance, followed by regulation issued by the OJP and then KPEI’s own rules. The capital markets authority does review all KPEI rules, investing them with legitimacy; and market consultations are conducted for rule changes. As is true in many other jurisdictions, most of the overall legal and regulatory framework has been built up over the years in different pieces and circumstances, as is perfectly normal for infrastructures. KPEI has documented these bases.


Most – but by no means all – critical concepts for operating a central clearing house are to be found in the documents presented. Much is implied, or derived from a different part of the law – contracts, for example, which do provide a sense of implicit legal backing for ownership of securities. These other parts of the law were not explicitly written for the securities markets environment, but they do provide some assurance. KPEI’s business is almost entirely based in Indonesia, and therefore only the Indonesian legal and regulatory framework is immediately pertinent. Indonesia is a G20 country, and with that status come the responsibilities of leading on the implementation of high global standards. System Design and Operations KPEI has developed and implemented its own system, which are e-CLEARS to support clearing and settlement for equity market, RMOL to support clearing and settlement for derivative market, and e-BOCS to support clearing and settlement for fixed income market. KPEI also provides risk management system through RAZOR to support guarantee services. Member Interface is also provided as the integrated tools for CM to update the information regarding CM’s position and collateral. CM can simulate their own position and collateral through this system.

As a CCP Exchange Trades All of Equities Exchange Trades (100%) on regular market are cleared under the e-CLEARS System. Trade Capture, Novation and Netting IDX transmits details of Exchange Trades directly from its trading system (JATS) to e-CLEARS system in batching. KPEI performs clearing process to determine clearing members’ (CMs) rights and obligations in terms of securities and/or cash which must be settled on settlement date. As a CCP, KPEI is the only seller for every buyer and the only buyer for every seller for every transaction settlement over every investment instrument that is traded in the stock exchange. This is possible by means of netting clearing process through novation. Securities Settlement under the C-Best System Settlement of e-CLEARS Positions is on a T+3 basis. All securities settlements are effected through book-entry transfers between stock accounts in KSEI. CMs with Positions can deliver securities to KPEI by inputting delivery instructions or through multiple batch settlement. KPEI as a clearing house is not responsible for the final settlement of securities in the market. The CCP relies on KSEI, the CSD, to conduct the actual delivery-versus-payment (DvP) settlements. All trades cleared by KPEI are settled on a DvP basis: the final settlement of cash obligation takes place only if the final settlement of the linked securities obligation occurs.


Money Settlement under Payment Banks KPEI uses the payment banks appointed by KSEI to settle cash. KSEI has designated five local banks as payment banks, through which all funds settlement must take place.


IV. Principle-by-principle Summary Disclosure

Principle 1: Legal basis

An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Overview 1.1 In KPEI, law and presidential decree have the highest position in terms of relevance, followed by

regulation issued by the OJK and then KPEI’s own rules.

1.2 The capital markets authority does review all KPEI rules, investing them with legitimacy; and market consultations are conducted for rule changes.

1.3 Most of the overall legal and regulatory framework has been built up over the years in different

pieces and circumstances, as is perfectly normal for infrastructures.

1.4 Most critical concepts for operating a central clearing house are to be found in the documents presented.

Material Aspects 1.5 The material aspects of KPEI’s activities that require legal certainty are:

a. Operational Permit as an institution providing clearing guarantee services b. Rights and Interest in financial instruments c. Netting d. Novation e. Settlement finality f. Dematerialisation g. DVP arrangement h. Collateral arrangements for the guarantee fund and margin i. The procedures and the recovery in the event of default

Legal Soundness 1.6 KPEI complies a well-founded, clear, transparent, and enforceable legal basis for each material

aspect by providing documents as follows: a. An institution providing clearing guarantees to the regulated marketplace is cited in the

Capital Market Law of 1995. b. The rights and interests in financial instruments are provided in national law and by

presidential decree as well as regulation. c. Netting is defined by Regulation III.A.10, published in December 1997.

http://www.ojk.go.id/en/capital-market-uu

http://www.ojk.go.id/en/iii-a-10-securities-transactions


d. Novation should also be covered explicitly by law. Novation is covered in contract enforceability, which comes in the Indonesian Civil Code.

e. Collateral arrangements for the guarantee fund and margin are covered by a regulation, not law. These are cited in KPEI Rule II-5. One sees references to dematerialised collateral in KPEI II-10, which is mislabelled a regulation when in fact it is a rule of the clearing house. KPEI Rule II-12 updates the concepts of collateralisation.

f. Default procedures is covered by law, though not explicitly in the capital markets context

http://new.kpei.co.id/Media/Default/Regulations/Ekuiti/201503170915_KPEI_Rule_No._II-5.pdf

http://new.kpei.co.id/Media/Default/Regulations/Ekuiti/No.%20II-10%20Scripless%20Securities%20Lending%20and%20Borrowing%20Services.pdf



Principle 2: Governance

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders. Governance of KPEI 2.1 The FMI’s objectives cover all the key areas of the organization’s activities. The objectives include

targets in the following material aspects: participant satisfaction, financial stability, risk management, service efficiency, system efficiency and effectiveness.

2.2 The instruments used by the FMI to measure performance include: financial indicators, key performance indicators (non-financial data, settlement statistics, etc.), qualitative assessments, participant feedback.

2.3 KPEI is governed by its board of directors and board of supervisors, a two-level oversight structure inherited from Dutch colonial days. The authorizations and responsibilities of both bodies are documented.

2.4 The overseers of KPEI come from the exchange, private sector and public bodies, assuring that the direction of the infrastructure meets both commercial and public good requirements. Exchange groups have that dual function, and this is embedded in the governance set-up. These persons bring diverse experience to the tasks before these bodies, and they are properly vetted.

2.5 Meetings are held monthly in Jakarta, and directors’ performance is evaluated. Questions of business risk and development are aired. The audit committee reports directly to the board of supervisors, not to board of directors of KPEI.

2.6 The roles and responsibilities of the management team are defined. The chief executive officer position is separated from that of the chairman.

2.7 The FMI’s board of directors has an acceptable mix of skills. This implies that the organization can

rely on its members of the board’s experience and background to provide a qualified view on the functioning of the FMI.

2.8 The roles and responsibilities of the management team are clearly defined in the KPEI charter and in

job descriptions. The objectives of the FMI’s management team are decided by the board of directors by itself.

2.9 The performance of the FMI’s management team is assessed using key performance indicators (KPI), financial results, systems uptime, and a qualitative assessment. The management team assessment takes place every quarter


2.10 The management team of the FMI uses the following mechanisms to gather the views and thoughts of the participants (direct and indirect) and stakeholders: public consultation processes, participant/user survey, user group, informal channels (networking, social media, word-of-mouth, etc). The Board of Directors uses a range of mechanisms to gather the views and thoughts of the direct and indirect participants and stakeholders. These mechanisms include informal channels (networking, social media, word-of-mouth, etc).

2.11 The FMI discloses its major decisions to participants, shareholders and the general public during its general meetings, both annual and extraordinary. It uses newsletters and emails, its website, direct mail, and local media channels.


Principle 3: Framework for the comprehensive management of risk

An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks. Risk Management Framework 3.1 KPEI has relatively clear lines of responsibility to identify and assess risks.

a. Board of Commissioners – Audit Committee; b. Board of Directors -- Credit Policy and Risk Management Committee, Haircut Committee,

and Internal Audit; c. Risk Management Division -- Guarantee Funds and Collateral Management Unit, Risk

Analysis Unit, and Risk Monitoring Unit.

3.2 KPEI has adopted the Enterprise Risk Management (ERM) Framework as its overall framework for identifying, assessing, controlling, communicating and monitoring risks. The risk management framework is reviewed once a year. The risks that arise in or are borne by KPEI include:

a. Liquidity risk The risk that KPEI fails to meet its cash flow obligations when they become due because of difficulty to liquidate assets or to obtain sufficient funding. KPEI is exposed to liquidity risks posed by margin and guarantee fund collected from clearing members, and its proprietary investments.

b. Counterparty/credit risk The risk that a counterparty defaults on its contractual obligations leading to a financial loss to the KPEI and / or its clearing members. KPEI’s credit exposures mainly arise from the clearing services provided to clearing members in its role as the central counterparty.

c. Reputational risk d. Operational risk e. Legal risk f. General business risk

3.3 Under the ERM framework, KPEI identifies risks by: audit (internal/external), processes and

procedures analysis, and feedback from participants. The scope of the identification and documentation of risk exposures and controls is wide (all areas, processes and procedures are covered).

3.4 The risk management tools used at KPEI include: risk registrar, specialised software, and risk matrix. Less than 25% of risk controls are manual. The manual intervention mainly arises from the checking of physical securities.


Risk Management Disclosures, Policies, and System 3.5 KPEI advises participants of key risk-related information concerning the business/operations of KPEI

via: the website, annual reports, newsletters, contract, e-CLEARS and Member Interface, as well as education & training programmes.

3.6 KPEI also operates a Member Interface, which provide clearing members with comprehensive information related to their positions, trading limits, and collateral from the risk management system (Razor). This provides the data that clearing members need for their own risk monitoring and management. The main facilities supported by Member Interface include: Clearing & Settlement; Collateral Management; Risk Management; and Securities Lending & Borrowing.

3.7 KPEI offers training sessions for clearing members in order to enhance their understanding of the technical details of the CCP operations. The training sessions cover a wide range of topics including the calculation of NAWC (Net Adjusted Working Capital) and trading limit, margin model, clearing and settlement based on netting per counter – Single Investor ID (NPC-SID), etc.

3.8 KPEI has put negative incentives in place for participants and, where relevant, their clients to monitor and manage the risks they pose to the CCP. KPEI may change a member’s risk profile, and recommend financial penalties or suspension of clearing to IDX when the member fails to manage and monitor its risk at a level that is acceptable by the CCP.

3.9 If the event of a default, KPEI shall impose sanctions set out in KPEI Rule II-8 and report the default to IDX and the regulator. Sanctions may be imposed on conditions other than a default event, including a failure to pay the Guarantee Fund or the administration fees and interests. The sanctions may take the form of the following:

a. Written Reprimand; b. Written Reprimand plus a fine; c. Administration fees; d. Suspension of clearing; e. Revocation of clearing membership.

With regard to the second type of sanction, for the first written reprimand, KPEI shall charge a fine up to IDR 2.5 million and / or request IDX to suspend the member from trading for up to ten trading days; for the second written reprimand, the maximum fine will rise to IDR 5 million and the suspension of trading can be as long as 20 trading days; the third written reprimand shall remain valid for one year and any further violation will lead to freezing of both the trading and the clearing membership. KPEI will charge an administration fee to the defaulting clearing member. The fee equals 0.25% of the default value for each calendar day until settlement of the default (30 calendar days at maximum).

3.10 KPEI closely monitors its own liquidity reserves and financial strength, and has controls and procedures in place, as well as disaster recovery and business continuity plans, to manage its own operational risk. Exposures to clearing members are managed by collecting margin deposits prior to trade execution, requiring NAWC daily maintenance and reporting, and adjusting the trading limit.

http://new.kpei.co.id/Media/Default/Regulations/Ekuiti/Rules%20II-8%20Eng.pdf


3.11 Clearing members can receive a variety of reports on the clearing and guarantee processes via Member Interface system and e-CLEARS system. The main facilities supported by e-CLEARS include: Clearing & Settlement; Collateral Management; and Securities Lending & Borrowing.

Recovery and Wind-down Plan

3.12 KPEI identifies scenarios that may potentially prevent the organization from providing its core

services. a. Natural disasters, including but not limited to: earthquakes, floods, and fires. b. Security problems, social, political, including but not limited to: the threat of a bomb

explosion, and riots. c. Technical problems in the system or IT services that affect business processes or services of

KPEI. d. Technical problems in the IDX trading system and / or KSEI Depository and Settlement

system. 3.13 KPEI has plans in place for business continuity. The recovery process includes the following

steps: a. Implementation of the action plan after activation of BCP / DRP. b. Mobilisation of resources for recovery of critical business processes. c. Recovery of business processes in accordance with a predetermined recovery strategy.

3.14 With regard to resolution (orderly wind-down of an FMI), KPEI’s owner, IDX would inject more

capital into KPEI in case that KPEI becomes insolvent. Such parental guarantee would provide critical financial support to the CCP in times of crisis. KPEI shares its recovery plans with the authorities, which are subject to annual review.


Principle 4: Credit risk

An FMI should effectively measure, monitor, and manage its credit exposure to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two largest participants and their affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions. All other CCPs should maintain, at a minimum, total financial resources sufficient to cover the default of the one participant and its affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions.

Credit Risk Framework 4.1 KPEI’s credit risk management framework consists of membership requirements, margin collection,

trading limit, alternate cash settlement, and guarantee fund arrangements. KPEI’s main credit exposures are from clearing members and payment banks.

4.2 KPEI’s Risk Management Division reviews and updates the framework annually as well as on an ad-hoc basis if circumstances warrant. An ad-hoc review / update can be triggered by changes in market conditions, changes in market practices, or introduction of new cleared products. The regulator (OJK) and the KPEI’s internal auditors are involved in the review of the framework. The review by OJK and internal auditors also take place once a year.

4.3 KPEI has credit exposures to the following entities: Clearing members; Settlement banks and other banks; Stock loans counterparties. Sources of credit risk from clearing members include weak financial condition of clearing members, daily and intraday price movements, and large/concentrated positions. Sources of credit risk from banks include cash settlement with clearing members, deposits from clearing members as margin or Guarantee Fund contributions, and KPEI’s own cash deposits. Sources of credit risk from stock loan counterparties include margin variation and loan value depreciation.

4.4 With regard to clearing members, a variety of tools have been adopted to control credit risk, including DVP settlement, margin requirements, daily maintenance and reporting of NAWC, and trading limits. KPEI is not involved in the selection of the payment banks and does not perform risk monitoring on these banks.

4.5 The financial resources KPEI collects or maintains to cover the CCP’s exposures include variation margin, initial margin, Guarantee Fund, the Credit Ring (replenishments from clearing members), KPEI’s own funds, and liquidity facilities provided by a commercial bank. All these financial resources


can be accessible immediately, except for the Credit Ring which is a requirement for all non-defaulting clearing members to replenish the Guarantee Fund within 30 days.

4.6 KPEI determines the sufficiency of its financial resources by performing stress testing. The stress tests are carried out on a monthly basis and are based mainly on historical and hypotical scenarios.

CP Admission Requirements and Regular Risk Scoring Analysis 4.7 Currently, corporation which is stipulated as Securities Company by OJK, as Exchange Member by

IDX, and as Participant by KSEI can be admitted as CMs. OJK and IDX act as front line regulators to supervise and monitor the CMs, while KPEI is responsible for monitoring CMs’ settlement activities and their compliance with the rules, and KSEI is responsible for custody services.

4.8 KPEI sets CM admission requirements to ensure that the risk profile of each CM meets the required standard, which are regulated in KPEI Rule II-12 regarding Collateral arrangements for the guarantee fund and margin and KPEI Rule II-3 regarding Clearing Member.

Mark-to-Market, Margining and Collection of Collateral Marks

4.9 To cover its current credit exposure, KPEI collects Marks for the mark-to-market losses of a CM’s

open Positions as a result of unfavorable price movements of the underlying stocks prior to settlement. Marks calculation is processed near real time using the latest positions and price information. For further details regarding Marks, please refer to the description under Principle 6: Margin.

4.10 KPEI has the capability to obtain the data and recalculate the measures near real time. With access to the real-time price data on IDX and Bond Pricing Agency, risk management system (Razor) can update trading data, collateral amount, and the resulting trading limit for each account within minutes.

Margin

4.11 KPEI adopts a value at risk approach to calculate Margin requirements. Margin is used to cover

the future exposure between the last Marks calculation and the projected closing-out price under normal market conditions. Margin calculation is conducted real time using the latest positions and price information. KPEI has the capability to obtain the data and recalculate the measures near real time. With access to the real-time price data on IDX and Bond Pricing Agency, risk management system (Razor) can update trading data, collateral amount, and the resulting trading limit for each account within minutes. In arriving at a CM’s Margin requirement, a margin credit up to IDR 1 billion is granted to every CM. A CM will only be required to provide Margin for the amount in excess of the Margin Credit. For further details regarding Margin, please refer to the description under Principle 6: Margin.


http://new.kpei.co.id/Media/Default/Regulations/Keanggotaan/201555110543_ENG_-_Peraturan_KPEI_II-3_tentang_Anggota_Kliring_v1.pdf


Concentration Collateral

4.12 KPEI requires a CM to provide Concentration Collateral. Frequency of calculation for Concentration Collateral is calculated monthly. For further details regarding Concentration Collateral, please refer to the description under Principle 6: Margin.

Guarantee Fund and other Financial Resources

Guarantee Fund Contributions

4.13 KPEI maintains a Guarantee Fund to meet its obligations and liabilities as a CCP if losses arising

from one or more CM defaults cannot be fully covered by the Marks, Margin and other collateral collected from the defaulting CMs. The Guarantee Fund can also be used as a source of liquid funds to meet any immediate payment obligations of KPEI in relation to a CM default. The Guarantee Fund comes from CMs’ contributions.

Stress Testing – Sufficiency of Financial Resources

4.14 The Risk Management Division has the responsibility to conduct the stress tests and to

communicate the results to the General Manager and the Board of Directors. There are clear procedures to report the test results to these decision-makers.

4.15 If the stress tests identify a shortfall in the financial resources, KPEI will not make or ask for immediate additional contributions to the Guarantee Fund to fill such a shortfall. The nature of the Guarantee Fund is quite different from a normal default fund of other CCPs. KPEI’s Guarantee Fund is accumulated through a standard market charge paid by the end investors (1 basis point of transaction value). Therefore, it is impractical to call for ad-hoc contributions to the Fund unless an event of default occurs. However, KPEI does take immediate action to fill any shortfall in margin through the mechanism of trading limits.

4.16 On a monthly basis, the assumptions and parameters used in the stress testing are examined. Currently, KPEI does not perform such examination on an ad hoc basis. Further, a full validation of the risk management model is carried out every year. The method, model, and parameters used to determine the size of the guarantee fund is reviewed by the Risk Management Division and the General Manager, and then reported to and approved by the Board of Directors.

Use of Guarantee Fund and other Financial Resources – the Waterfall 4.17 In the event of a CM default, KPEI will first use the available non-pooled resources, such as

Marks, Margin and other forms of collateral collected from the defaulting CM to cover any default loss. Thereafter, KPEI will apply other financial resources in accordance with OJK regulation no 26 (article 21). Please refer to the description under Principle 13: Participant-default Rules and Procedures.




Allocation of Default Losses and Replenishment/Repayment Arrangements

4.18 The replenishment of resources is stipulated by: a. KPEI rule No.II-4 Guarantee Fund and Additional Guarantee Fund b. KPEI rule No.II-14 Credit Ring.

4.19 Allocation of credit losses and the order in which the financial resources will be utilised are

stipulated by: a. OJK Regulation No.26 2014; b. KPEI rule No.II-4 Guarantee Fund and Additional Guarantee Fund; c. KPEI rule No.II-5 Clearing and Settlement of Equity Securities; d. KPEI rule No.V-1 Clearing and Transaction Settlement Guarantee of Debt; e. KPEI rule No. III Future Transaction Clearing And Settlement Guarantee; f. KPEI rule No. IV Stock Option Transaction Clearing and Settlement Guarantee.


http://new.kpei.co.id/Media/Default/Regulations/Keanggotaan/201531180909_KPEI_Rule_No._II-14.pdf




http://new.kpei.co.id/Media/Default/Regulations/Obligasi/V-1-Efek%20Bersifat%20Utang.eng.pdf

http://new.kpei.co.id/Media/Default/Regulations/Derivatif/Peraturan%20No.%20III%20English%20%28baru%29.pdf

http://new.kpei.co.id/Media/Default/Regulations/Derivatif/201520170925_KPEI_Rule_No._IV.pdf


Principle 5: Collateral

An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.

Acceptable Collateral

5.1 KPEI considers liquidity, credit risk, volatility, availability of reliable and timely market prices, and the

ease with which security interest can be perfected when determining the list of acceptable collateral.

5.2 Eligible collateral is classified into two categories: online collateral and offline collateral. Online collateral includes cash bonds, stocks, while offline collateral includes time deposits, bank guarantees and certain money market instruments.

Valuation and Haircut

5.3 KPEI normally marks its collateral to market on a daily basis using price data from IDX and Bond

Pricing Agency. Mark-to-market can be conducted intra-day in times of high volatility. KPEI has the right to value assets differently from the market when market prices do not represent the true value. This right is stipulated in KPEI Rule II-12.

5.4 As regards online collateral, non-IDR cash is subject to a cross-currency haircut. Bond haircuts are based on credit rating, with a 0% haircut for government securities and a 20% haircut for BBB rated corporate bonds; stocks are grouped into eight categories and haircuts vary by category. This categorisation is based on a weighted average score calculated for each stock. KPEI scores each stock on its transaction data (volatility, volume, and trading frequency) and the issuer’s fundamental data (equity, net income, price-to-earnings ratio and return-on-equity ratio). Stocks fall under the first category will be subject to a haircut of 5%-40%, while a 100% haircut will apply to the eighth category. When determining the value of stock collateral, KPEI will use the lowest price of that stock during the last four days, and then multiply it by (1 – haircut).

5.5 KPEI has established a Haircut Committee which reviews and updates the haircuts for stocks monthly. Members of the Haircut Committee include representatives from clearing members, Directors of IDX, KPEI, KSEI and capital market experts. KPEI takes a conservative approach in setting haircuts. A wide range of fundamental and statistical data is taken into account.

5.6 To mitigate concentration risk, KPEI sets limits on each type of online collateral that clearing members can post. For stocks, one clearing broker can post no more than 10% of the total scriptless shares of a listed company to the CCP.



Cross-border (or Foreign) Collateral 5.7 KPEI does not accept cross-border collateral other than cash and time deposits in USD and SGD. The

exchange rates used for these currencies are the rates published by the Directorate General of Taxation. Foreign exchange risk is taken into account by the imposition of a cross-currency haircut. At present, this haircut is set at 5%.

Collateral Management System

5.8 KPEI has a set of collateral management systems, composed of e-CLEARS, ARMS & Razor. KPEI

operates e-CLEARS for online collateral and ARMS for offline collateral, and both of them are supported by Razor.


Principle 6: Margin

A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk-based and regularly reviewed.

Marks

6.1 To cover its current credit exposure, KPEI collects Marks for the mark-to-market losses of a CM’s

open Positions as a result of unfavorable price movements of the underlying stocks prior to settlement. Marks calculation is processed near real time using the latest positions and price information.

Margin

6.2 KPEI adopts a value at risk approach to calculate Margin requirements. Margin is used to cover the

future exposure between the last Marks calculation and the projected closing-out price under normal market conditions.

Benchmark Margin Rate (Benchmark Rate)

6.3 KPEI determines the Benchmark Rate with reference to the projected volatility of daily closing of the

99% of confidence level for all cleared products. Two-tailed confidence interval of 99% (2.33 standard deviations) using an exponentially weighted moving average model with reference to a historical data period of 505 days. A five-day close-out period is assumed in the model.

Concentration Collateral

6.4 KPEI requires a CM to provide Concentration Collateral. Frequency of calculation for Concentration

Collateral is calculated monthly. For further details regarding Concentration Collateral, please refer to the description under Principle 6: Margin.

Price Data for Marks, Margin and Collateral Calculations

6.5 The sources of price data for the margin system of KPEI are:

a. For on-exchange equity products, the real-time traded prices on IDX; b. For bonds, the daily prices provided by a third-party.

6.6 This third party price provider for bonds is the Indonesia Bond Pricing Agency (IBPA). IBPA was

established under Bapepam-LK Regulation No. V.C.3 to conduct valuation on debt securities, Sukuk, and other securities to produce objective, independent, and credible prices. The ownership of IBPA is equally shared among KPEI, KSEI, and IDX.

http://www.ojk.go.id/Files/regulation/capital-market/bap-rules/sc-scr-etc/1/VC3.pdf


6.7 KPEI has procedures in place for estimating prices when prices are not available or reliable. To estimate prices, KPEI will use different methods for liquid and illiquid securities. A security will be treated as liquid if it was traded at least ten times a day during past 505 days. For liquid securities, KPEI will adopt the price on the last trading day for margin calculation in case no reliable price is available on the current day. With regard to illiquid securities, KPEI will use interpolation to estimate the price – 50 data points are needed within every 10 days.

Back-testing of the Margining Model

6.8 KPEI conducts back-testing of its VaR margin model on a weekly basis in the Razor system. Observed

price fluctuations are compared with the outputs of the margin model to evaluate margin coverage. On each test, KPEI validates the total exposure during the last 5 days (HsVaR) or 10 days (Alt VaR). The testing is based on a 99% confidence level and a measurement period of 505 days. The exceptions (where calculated margin proved to be insufficient) identified over the measurement period should not exceed 5 times. In case that the model did not provide sufficient coverage, KPEI would consider changing the margin parameters, or review the whole model.

6.9 The results of its back-testing will be reported on a monthly basis. Razor will make a snapshot of the results and automatically send it to KPEI’s warehouse data. The report normally includes the number of observations, the expected number of exceptions, and the actual number of exceptions. In case the margin model is deemed to be inaccurate, a warning will be included in the report which will be flagged as a ‘high level report’ for review.


Principle 7: Liquidity risk

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.

Sources of Liquidity Risks

7.1 The major sources of KPEI’s liquidity risks are as follows:

a. Default of CMs – as a CCP, KPEI is exposed to liquidity risk primarily in relation to the funding of the defaulting CM’s money settlement obligations;

b. Default of liquidity providers – KPEI has arranged committed credit intraday with selected liquidity providers to meet the liquidity needs of securities transaction settlement, hence KPEI also arranged committed credit facilities with one liquidity providers to face the default of CM;

c. Operational or financial failure of Payment Banks – KPEI also faces liquidity risks related to the inability to meet the release of surplus Margin, Guarantee Fund, and collateral of CMs and/or use buying CMs’ cash prepayment to settle its money settlement obligations to selling CMs due to failure of Payment Bank(s). KPEI also takes into account the liquidity risk associated with the default of any entity that takes on multiple roles, e.g. where a Payment Bank is also a liquidity provider;

d. Illiquidity of investments or collateral – KPEI’s Investment Policy aims to ensure that investment portfolios are sufficiently liquid at all times. This is described in greater detail under Principle 16: Custody and Investment Risks.

Liquid Resources

7.2 KPEI invests Guarantee Fund and Guarantee Reserve only in assets with low credit, market and

liquidity risks in accordance with the Investment Policy. The Investment Policy also sets out minimum liquidity requirements on investments and a concentration limit for each Payment Bank to ensure that KPEI has sufficient liquid resources to meet projected and stressed funding requirements.

7.3 KPEI does not have access to central bank services; however, KPEI has arranged unsecured committed credit facilities with options to draw down on the same day in five commercial payment banks. In a CM default situation, these facilities, together with the defaulting CM’s Marks, Margin, collateral, the Guarantee Fund, reserved funds would be available to meet the liquidity needs over multiple days following the occurrence of the default.


Managing Liquidity Risk and Stress Testing

7.4 KPEI must monitor cash, and most notably collateral liquidity risk. The FMI has the tools and

mechanisms to identify, measure and monitor settlement and funding flows. KPEI does get settlement information from KSEI.

7.5 KPEI can see participants’ cash balances or get the information on those figures at several points in the day, but not continuously. In practice, the FMI monitors the cash balance in the participant’s account more than once per day at pre-arranged and fixed times. KPEI uses this information to feed its risk management model. Given the very good track record for clearing, this appears to work well. KPEI has set up an alert that would be triggered if there are not enough funds in the participant’s account. This cash check takes place less than 10 minutes before each batch run.

7.6 When participants do not seem to have sufficient securities to cover their daily obligations, KPEI alerts the participant that there is a potential deficit in their account, warns participants that might be affected if the trade fails, and alerts the FMI’s management team. The securities shortfall alerts would be triggered less than 10 minutes before the batch run. In the event that an alert is triggered indicating that a participant may not be able to fulfil their obligations, the FMI has in place the following resolution procedures.

7.7 KPEI conducts stress tests in order to assess whether it has enough liquid resources. It uses historical data and puts them in hypothetical simulations. It has to be remembered that some half of the margin is in bank deposits, with the securities collateral kept in separate accounts with the custodian banks. There is a very solid cash base in this CCP to absorb shocks; this is a simple, effective, and prudent way to organize liquidity.

7.8 The stress testing has been reviewed by an independent consultant. The hypotheses of the tests are reviewed annually by KPEI, and tests are conducted monthly. The scenario(s) used imply high securities price volatility and/or FX speculation in financial markets (e.g. a 30%-change in FX rate against US dollar in a short period of time). In terms of data frequency employed for the historical stress testing, KPEI uses more than a year of daily data.

7.9 The estimates give results in which KPEI management has at least 99% confidence. The results of the stress test are accessed by the management team and the Board of Directors. The FMI’s stress testing model is an in-house design, with the methodology reviewed by a private consultant.

Replenishment of Liquid Resources

7.10 For the replenishment of the Guarantee Fund, please refer to Principle 4: Credit Risk for more

details.


Principle 8: Settlement finality

An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.

The concept of settlement finality is not well supported by Indonesian law. Although the actual final settlements take place at KSEI and the payment banks, KSEI does perform clearing and settlement in its own books. Finality in KPEI’s system takes place at the end of each batch on the settlement date. The deposit of margin becomes final at the point of blocking in the collateral account. Similar to finality, irrevocability in Indonesia is only recognised in practice, not in law.


Principle 9: Money settlements

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money.

9.1 KPEI settles in commercial bank money, although there is a plan to introduce central bank money.

Five local banks have been selected by KSEI as payment banks. These banks are assessed by KSEI on its company profile, IT, organization support, and service price& credit facility. KSEI relies on the regulators, i.e. OJK and Bank Indonesia, for the ongoing monitoring of payment banks. The primary responsibilities related to bank supervision have been transferred from BI to OJK since 2014, but BI still oversees banks that are members of the RTGS system. BI is able to monitor real-time positions of banks and conduct due diligence to assess their liquidity and system reliability. These banks are obliged to complete a self-assessment on an annual basis covering governance, operations, IT infrastructure, human resources, audit, etc. OJK and BI cooperate on bank supervision and holds forum to discuss their findings.

9.2 KPEI does not have direct contracts with the payment banks. There is a service level agreement with KSEI which covers the use of payment banks. The legal agreement between KSEI and the banks states when cash transfers occur and that transfers are final when effected. Transfer of funds finality is documented in law 3 of 2011 (the Funds Transfer Law), in article 3, paragraph 3, letter C. The moment when funds received are transferable is clearly stipulated in the KSEI's contract and legal agreements with its payment banks. Between KPEI and the banks, finality occurs upon settlement. Funds received are generally transferable in real-time, depending on time of receipt during the day.

http://www.ojk.go.id/en/banking-regulation-law-on-fund-transfer


Principle 10: Physical deliveries

An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries.

Physical delivery of goods is not a subject for KPEI. IDX does not have commodities trading.


Principle 11: Central securities depositories

A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilised or dematerialised form for their transfer by book entry.

The work of a central securities depository is not a subject for KPEI. KSEI is the group CSD


Principle 12: Exchange-of-value settlement systems

If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.

The CCP relies on KSEI, the CSD, to conduct the actual delivery-versus-payment (DvP) settlements. All trades cleared by KPEI are settled on a DvP basis: the final settlement of cash obligation takes place only if the final settlement of the linked securities obligation occurs.


Principle 13: Participant-default rules and procedures

An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Event of Default 13.1 The conditions for which the FMI may declare a participant in default are failure to make a payment.

If there is a failure to deliver securities, alternate cash settlement will be activated and the participant can give the cash equivalent. Only if there is a failure to give cash is there a real default. If variation margin turns negative and there is a failure to pay additional variation margin, then trading is blocked.

13.2 In the event of a default, the FMI takes the following actions: suspension of trading and clearing, use of the defaulter's margin deposits, and liquidation of positions. According to its rules and procedures, KPEI could promptly use the following financial resources to cover the losses resulting from a default: the defaulter's assets, the CCP's own funds (the guarantee reserve), credit facilities, and the guarantee fund. If the existing resources are insufficient to cover all the losses, a non-defaulting participant would be obliged to pay unlimited replenishments (known as the Credit Ring).

Default Procedures 13.3 KPEI has default management procedures in place. The risk management department and the legal

department will collaborate to address defaults. OJK Regulation no 26 (article 21) clearly states that KPEI is the party responsible for default procedures. One can infer what would be done, but correct procedure as to which persons within KPEI are involved would be better.

13.4 The existing communication procedures ensure that the FMI could reach all stakeholders immediately, including the regulator(s). The following key aspects of the default rules are publicly available: broadly speaking, the circumstances in which action may be taken, who may take those actions, the scope of the actions which may be taken, including the treatment of both proprietary and client positions, funds and assets, the mechanisms to address an FMI’s obligations to non-defaulting participants.

13.5 Each year, KPEI conducts review of its default procedures. The results are shared with the Board of

Directors, those involved in managing risk, and the regulator(s). The FMI would then consider any required amendments to the rules and procedures.

Total Available Resources and Default Waterfall 13.6 Under OJK Regulation no 26 (article 21), the order of available resources and default waterfall is as

follows: a. Guarantee Reserve;




b. Bank loan, if there has been a contract between Clearing Guarantee Institution and the bank; c. Guarantee Fund; d. financial sources from other Credit Network members, when all sources of fund as referred to in

letter a, letter b, and letter c have been used but are insufficient, with the following proportions:

20% (twenty percent) of the total amount of fund needed to pay the obligations of Clearing and Guarantee Institution shall be equally divided among the remaining members of Credit Network;

80% (eighty percent) of the total amount of fund needed to pay the obligations of Clearing and Guarantee Institution shall be proportionately divided among the remaining members of Credit Network in accordance with the Clearing value of each Credit Network members during the latest 6 (six) months; and

the total unpaid amount within 30 (thirty) days by a particular member of Credit Network, shall be re-divided among the remaining Credit Network members in accordance with the provisions stated in number 1 and number 2.

Allocation of Default Losses and Replenishment/Repayment Arrangements 13.7 Repayment of fund sources must be conducted in accordance with the following priority order:

a. Guarantee Fund; b. Credit Network; c. Bank loan; and d. Guarantee Fund.

13.8 In the event of a CM default where non-defaulting CMs’ contributions to the financial resources are

used to cover a default loss, such contributions will be applied to share the default loss on a pro-rata basis by reference to CMs’ respective contributions to the financial resources immediately prior to the default. KPEI will require its participants to replenish the deficiency of their financial resources Contributions as a result of such application within three business days or such other time period as may be specified by KPEI. Please refer to the description under Principle 4: Credit Risk for further information.


Principle 14: Segregation and portability

A CCP should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions.

14.1 KPEI provides clearing services for clearing members and their client (client clearing).

Segregation of client assets is provided at the beneficial owner level, i.e. individual segregation.

14.2 Segregation of client assets is supported by the Indonesian law. The Capital Market Law 8, in its article 37, provides for segregation of brokers’ assets from clients’ assets at the broker level. It specifically states that client securities should be kept by brokers on a bankruptcy-remote basis and brokers should maintain separate records for each client. Furthermore, article 43, paragraph 1 in the Capital Marker Law stipulates that only the CSD or an authorised bank can act as custodians. Meanwhile, article 44, paragraph 2 (in the same legislation) indicates that securities on deposit must be maintained and recorded separately. Further, Bapepam rule III.C.7, article 2 stipulates that participants should open sub-accounts at the CSD in order to safe keep their clients’ securities. Therefore, KPEI’s accounts, which are mirrored with KSEI’s accounts, also segregate settlement securities and margin collateral for each client.

Account Structure 14.3 The CCP can identify client's positions and client's collateral (i.e. clients' accounts can be

distinguished from clearing members' house accounts). Moreover, individually segregated accounts are provided to each client of the same clearing member. Pursuant to KPEI Rule No.II 5, a clearing member should open one Guarantee Sub Securities Account for each client. The Guarantee Sub Securities Account is in the name of the client and is used for settlement of exchange transactions and placement of collateral.Clients’ collateral covers initial margin and variation margin.No margin netting is allowed across different clients.

14.4 Although KPEI has the right to access information in clearing members' records as stipulated by its rules, the CCP does not rely on clearing members' records to ascertain each client's positions and collateral.

Portability Arrangements 14.5 Portability is not available at the moment; however, such arrangements will be established

when the derivatives market is re-launched.





http://www.ojk.go.id/en/iii-c-7-securities-sub-account-with-central-securities-depository



Principle 15: General business risk

An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.

Identification of Business Risks 15.1 The FMI has identified potential losses related to general business risks, excluding losses

resulting from participant default or credit or liquidity risk losses covered by financial resources.

15.2 The following methods are used to monitor business risks: market data (financial indicators, balances, exposures, etc.), and the KPEI enterprise risk-management program. The market data give KPEI management a perfect picture of revenue from daily trade transactions on IDX. Internal audit assesses several types of risk listed above, and monitors them with qualitative measures.

15.3 The following mechanisms are used to manage the FMI's general business risks: cost/project

management policies, insurance, risk training and awareness, audit/regulator recommendations. Insurance policies cover civil liability and property.

15.4 KPEI also assesses the effectiveness of its business risk management tools by constant use of key performance indicators (KPIs), getting feedback from participants/the regulator, and audit reviews. The internal audit reviews are shared with Deloitte, the KPEI statutory auditor, and the OJK. Staff gets training to raise awareness of risk sensitivities, and these programs include line managers. Important feedback comes from the ongoing ISO 9001 certification, which includes participant views on risk management. KPEI is certified ISO 9001 for the quality of its management systems.

Financial Resources for Business Operations

15.5 The FMI pre-allocates a specific percentage of its reserves funds for operating expenses, and

keeps a high level of net liquid assets. The FMI does not have an official recovery and orderly wind-down plan. The FMI does not have a formal plan in place to raise additional equity. This might not be a problem of observance – it probably is well capitalized as it is, and given its ownership this is not a central concern. During the due diligence visit, IDX, the sole shareholder of KPEI, indicated that IDX would provide additional capital to the CCP if needed.


Principle 16: Custody and investment risks

An FMI should safeguard its own and its participants’ assets and minimise the risk of loss on and delay in access to these assets. An FMI’s investments should be in instruments with minimal credit, market, and liquidity risks.

Custody of Assets 16.1 KPEI holds cash and securities. Its own cash is held with a paying bank and comercial banks with

certain criteria, its securities are with a custodian bank. Meanwhile, participants' securities are held with KSEI. Being in different institutions, KPEI’s assets are well segregated. Client assets with KSEI are reconciled at the end of every trading day.

16.2 KPEI engages the services of two custodian banks. In the way the accounts are structured, cash deposits are held separately from securities and derivatives. Derivative contracts are backed by cash only, managed and held at the deposit bank.

16.3 KPEI selects and monitors the services of custodian banks, and this includes due diligence

reviews. The criteria that the FMI use to select its custodian bank(s) are history and experience. In addition, KPEI relies on Bank Indonesia’s use of the standard central bank methodology of monitoring bank risk, the CAMELS ratings: Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to Market Risk.

16.4 To monitor its exposure to its custodian banks, KPEI uses market data, the bank's account and

reports, news and information on the radio, third-party reports, regulator's reports and information, and KPEI's audits and reports of its custodians. The FMI rates the risk management arrangements of its custodians as good. They also continue to be well rated by the central bank CAMELS system.

Investment Strategy

16.5 The FMI has a documented investment strategy. The investment plan is disclosed to

stakeholders. The investment plan is appropriately simple for infrastructure. It is broken down as follows: a minimum of 35% in time deposits up to one month; a maximum of 45% in government and corporate bonds with maturities of not more than ten year; and a maximum of 25% in mutual funds. Some of the investments are in enterprises which are government owned, and the securities issued have explicit guarantees to investors. There are some time deposits in foreign currencies to cover foreign currency costs. All is in the domestic market. The default fund has a maximum of 50% exposure to government securities, with the rest in commercial bank time deposits. These assets are managed separately. KPEI has the right to take up to 10% of the profits from the investment return.

16.6 KPEI’s investment plan is reviewed every two years. The performances are reviewed monthly, as are the allocation limits to make sure they are respected. KPEI also provides investment report in


daily and monthly basis. The FMI does not invest participant assets in the participants’ own securities or those of its affiliates. There are no IDX group securities in the investments. KPEI's management team approves the investment plan, which is disclosed to shareholders and the regulator.


Principle 17: Operational risk

An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI’s obligations, including in the event of a wide-scale or major disruption.

Operational Risk Management Framework 17.1 KPEI has an operational risk framework that is formalized and circulated. It is drawn up by

internal control for senior management and the board, and is available and shown to the statutory auditor and OJK. There is risk awareness in KPEI.

17.2 The FMI's internal structure to identify operational risk elements includes a “risk committee” including board members, and the risk department. The FMI identifies operational risks through audit (internal/external), processes and procedures analysis, feedback from participants.

17.3 The areas that the risk policy covers include: IT systems, human resources, clearing and settlement, membership, communications and finance. KPEI has operational risk controls in place.

Review, Audit and Testing 17.4 The board explicitly reviews and endorses KPEI's operational risk management framework

yearly. But in conversation in Jakarta, it had to be admitted that there might be more formalism in this than substantive understanding as to how the risk framework actually guides KPEI business planning.

17.5 More than 80% of the processes and procedures have a defined operational guideline or manual. The elements that form the operational guidelines and manuals are as follows: process or procedure owner, line manager responsible, flow chart/diagram, bullet points, tick or check lists, lines of support, contingency plans.

17.6 Operational guidelines and manuals are reviewed every year by the process owner, line

manager, internal auditor, external auditor. Staff can raise awareness by using their risk logs, and getting in touch with internal operational audit colleagues. The internal audit team reviews critical processes and procedures, and monitors key risks areas once a year. It also reviews non-critical processes and procedures, and monitors other risks areas once a year.

17.7 The scope of the internal audit includes: physical security, instruction processing, securities

lending, settlement processing, cash clearing, reporting, accounting and other administrative processes. IT colleagues collaborate in operational audits, and IT audits are conducted annually by


the external statutory auditor. The scope of the IT audit includes: physical security of IT, access and account controls, operational procedures, operational controls, software change and upgrade.

17.8 External audits are conducted once a year. The scope of the external audit includes: physical

security, instruction processing, securities lending, settlement processing, cash clearing, reporting, accounting and other administrative processes. The auditors have access to the Board of Directors and the persons involved in the so-called Risk Committee.

Operational Reliability Objectives and Capacity Scalability

17.9 KPEI has an operational reliability plan. Its down-time tolerance threshold is 3% of total daily

operating hours. Over the last 12 months, the FMI’s systems down-time averaged 1% of daily operating hours.

17.10 The FMI’s recovery point objective (RPO) is 5 minutes before the loss of availability. The FMI’s recovery time objective (RPO) is between 5 and 20 minutes. The FMI’s publishes its operational reliability (OR) objectives in its Business Continuity Management Document (BCM).The reliability objectives are disclosed to management team, board of directors, regulator, and auditors. These objectives are reviewed once a year. KPEI’s operational reliability plans include monitoring.

17.11 KPEI assess its systems capacity utilization quarterly as preventive maintenance, with an

objective of keeping its system capacity is at 80% of installed capacity. The risk management framework does not describe any contingency measures to increase IT capacity. However, the IT team has a mid- and long-term investment plan to address systems capacity needs looking ahead.

17.12 The FMI tests its systems capacity simulating conditions of market stress. The results are

disclosed to the management team, external auditor, internal auditor, and the board of directors. Capacity utilization under stress conditions is tested every four years or more.

Physical and Information Security Policies

17.13 The security and safety plan is prepared by the FMI's security department, and is reviewed every

two years. The measures the FMI takes to limit individuals’ physical access to the FMI's systems and materialized securities include the use of building security / guards, keypad PIN, ID card, biometric measures. The electronic security measures applicable to the FMI’s staff members include individual user names and passwords, roles based limitations, remote access limitations.

17.14 In terms of wide systems security measures, the FMI has in place firewalls, malware, spyware and anti-virus applications, and an intrusion detection system. In order to protect its equipment from fire, flooding or natural disasters, the FMI has in place its vault in a seismic-resistant building, gas-based fire suppression system, fire extinguishers, and water sprinklers.

17.15 There is a complete disaster recovery (DR) plan at KPEI. KPEI’s business continuity (BC)

arrangements include a dedicated BC site. Between 30% and 49% of KPEI's staff can operate from the BC site. KPEI estimates that it could operate from its BC and DR site for one year. The FMI has


identified clear lines of responsibility, as well as a defined hierarchy tree to replace key staff in case of emergency.

Principle 18: Access and participation requirements

An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.

Participation Requirements and Ongoing Monitoring

18.1 The FMI imposes operational requirements for its participants. There is only one class of

participants, and they are subject to the same requirements. Access is, however, fairly maintained. There are no distinctions drawn between foreign and domestic participants, either.

18.2 KPEI requires that its participants meet minimum criteria in terms of connectivity/systems, and that participants meet minimum financial criteria specified in function of the needs and risks of the FMI. KPEI requires that participants meet specific legal criteria that it drafts. The broker capital and liquidity requirement is 25 billion IDR.

18.3 Market participants must meet specific financial, operational, and legal requirements drafted by

regulators and/or documented in the law. The same criteria apply to all classes of participants. Currently, all exchange members of IDX are clearing members of KPEI. The criteria that participants must meet to have access to the IDX and KPEI are reviewed by the management team, by the board of directors, and by the authorities. These criteria are also reviewed on an ad-hoc basis, as when law or regulation change.

18.4 KPEI monitors participant compliance with access criteria by receiving reports from its members.

To monitor participation compliance, KPEI demands and receives timely and accurate information. If needed, the FMI can rely on specific procedures for conducting enhanced surveillance or imposing additional controls for a participant whose risk profile deteriorates.

Suspension and Termination of KPEI Participation

18.5 If the situation arises and there is a need to manage the suspension and orderly exit of a

participant that breaches, or no longer meets, the participation requirements, KPEI would notify the participant. KPEI can exclude a participant together with IDX.

18.6 This point ties back to the question of asset portability from one participant to another, and because of full account segregation KPEI has a very strong commercial advantage. In case of suspension or the orderly exit of a participant, the steps that KPEI undertakes to disclose its decision include notification to all the other participants, public disclosure on its website, newsletter /email.


Principle 19: Tiered participation arrangements

An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.

Tiered participation is not a subject for KPEI; there is only one kind of membership.


Principle 20: FMI links

An FMI that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks.

CSD Links

20.1 KPEI has links in place with KSEI, as well as other critical actors in the financial system which are not considered financial markets infrastructures by CPMI-IOSCO for the purposes of this assessment. When deciding to establish a link, the FMI analyses and takes into consideration the legal risk, credit risk, liquidity risk, custody risk, operational risk that would be entailed.

20.2 In addition to KSEI, KPEI works very closely with: a. Stock Exchange (IDX) b. Payment banks for margin and settlement on the derivative market (5 commercial banks) c. Custodian banks (3custodian banks as lender for securities borrowing and lending) d. Clearing members (116 securities companies)

20.3 The FMI reviews the identified risks annually and when changes arise. The FMI analyses whether

the link arrangements are consistent with other principles annually and when changes arise. CCP Link

20.4 KPEI has no links to any other CCP, and has no immediate plans to do so. This Key Consideration

will be important when IDX joins in trading and clearing on the ASEAN platform.


Principle 21: Efficiency and effectiveness

An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.

Design of the Operational Model

21.1 KPEI aims to meet the needs of its participants and the market on an on-going basis. When it

was designed, the needs of its participants and the market were taken into account in relation to clearing and settlement arrangements, operating structure, delivery systems and technologies. In order to assess whether KPEI continues to meet the requirements and needs of its participants and other users, KPEI uses:

a. Specific user group meetings Whenever a new project is initiated at KPEI, a specific user group will be established to collect the opinions and ideas from the clearing members.

b. Committees consisting of clearing members The Credit Policy and Risk Management Committee provide advice to KPEI regarding credit policies, risk management measures, guarantee fund, and default events. Members of this committee are representatives from five clearing members that are not affiliated to each other. The term of office is one year; each member can serve up to two years in a row. The committee holds meetings on a monthly basis. The establishment of this committee is stipulated by KPEI Rule II-9.

c. The Haircut Committee reviews and sets haircuts for eligible stocks as collateral on a monthly basis. This committee also consists of five representatives from director of clearing members, director of IDX, director of KPEI, director of KSEI, and capital market experts.

d. General meetings held annually and when changes arise e. Client surveys/questionnaires conducted annually

This questionnaire enables clearing members to review the performance of KPEI and provide feedback. KPEI amends the questionnaire every year to incorporate current issues.

f. Annual board meetings where participants are represented Objectives

21.2 KPEI sets measurable goals and objectives to assess the effectiveness of its operations, including

service level targets, risk management expectations, financial targets, client satisfaction index, etc. In order to ensure that it has clearly defined goals and objectives that are measurable and achievable, KPEI considers relevant costs and reviews the goals against international standards.

21.3 To establish its degree of efficiency and effectiveness, KPEI uses the analysis of metrics and tools

such as KPIs, client satisfaction surveys / questionnaires; evaluation by external professionals (auditors, regulators, and consultants).The assessment of through KPIs is done monthly. OJK

http://new.kpei.co.id/Media/Default/Regulations/Ekuiti/Rules%20II-9%20Eng.pdf


conducts quarterly reviews on KPEI. ISO audits are conducted semi-annually now and will be an annual exercise going forward.

Principle 22: Communication procedures and standards

An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.

22.1 KPEI communicates with IDX, clearing members, payment banks, and the regulator via a secure

private network. File Transfer Protocol (FTP) is used to exchange data with IDX and KSEI. Clearing members access information and upload instructions via their browser.

22.2 It is not market practice in Indonesia to use reference data standards, such as ISINs, BICs or IBANs.


Principle 23: Disclosure of rules, key procedures and market data

An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.

Rules and Procedures 23.1 KPEI's rules and procedures are based on national law and market regulations, and are

promulgated through the operational handbook and terms and conditions in the membership agreement.

23.2 A rule amendment can be initiated by KPEI, by the instruction of the regulator, or upon request by clearing members. An amendment will normally involve a consultation process. The organisations included in the consultation process include: participants, shareholders, regulators, and other SROs (IDX and KSEI).The length of the consultation period varies, depending on the level of significance and complexity of the issue. On average the consultation process lasts between two weeks and a month.

Disclosure

23.3 The rules are disclosed to clearing members via KPEI’s website (in both Indonesian and English),

and through the welcome/introduction pack for new members. Clearing members are advised of their rights, duties and obligations through KPEI’s website and rules, the Membership Agreement, and through national legislation and regulation. Some of the potential risks faced by clearing members, such as obligations to the guarantee fund, suspension of membership, etc., are specified in the KPEI rules and the Membership Agreement. Further, KPEI publishes a description of the primary risks it is exposed to in its Annual Report which is a publicly available document.

23.4 KPEI runs a comprehensive training programme to help clearing members understand its operations and the risks that may arise from the clearing and settlement processes. KPEI has developed training manuals for several standard modules, such as securities lending and borrowing, operational settlement, single investor identity (SID), the calculation of NAWC, as well as margin and default fund calculation. KPEI also arranges irregular training on specific topics related to operational risks.

23.5 KPEI publicly discloses its fees at the level of its individual services, i.e. equities clearing, bonds

clearing, securities lending and borrowing, and derivatives clearing. The information on fees is made public via the KPEI website. Alterations in fees will be announced more than six months in advance via newsletter (email) and direct mail (e.g. physical letter). Pursuant to OJK regulation, any fee


change should involve a consultation process which on average lasts between two weeks to one month.

23.6 This assessment is the first CPSS-IOSCO self-assessment and KPEI plans to undertake this assessment every two years or in the event that a material change occurs that may affect the level of observance.

Jurisdiction(s) in which the FMI Operates: Authority ... for... · KPEI is owned entirely by PT...

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