Collateral management is a risk management tool used by KPEI to manage counterparty credit risk of Clearing Members. In accordance with Indonesia FSA Rule Number 26 Year 2014 regarding Exchange Transaction Settlement Guarantee, collateral is fund, securities, and/or other financial instruments belong to the Clearing Member as guarantee that can be used by the Clearing Guarantee Institution to settle securities exchange transactions and/or to settle obligation of Clearing Member to Clearing Guarantee Institution.
KPEI require Clearing Members to deposit collateral in the form of fund, securities and/or other financial instruments that have received approval from KPEI as guarantee to assure the exchange transactions settlement obligations. As for Clearing Member clients, depositing collaterals can be done in the collateral sub-account of the respective client and only in the form of securities and/or funds. In addition to serve as part of risk management to guarantee the Exchange Transaction settlement, Collateral deposited by Clearing Member to KPEI can be used for exchange transactions settlement of both the clearing members and their clients. While collateral pledged by the Clearing Member customers serve as guarantee for the exchange transactions settlement obligations of the respective customers.
In order to mitigate credit risk to minimize the impact of the risk event, KPEI imposes a haircut mechanism or reducing the value of each collateral instrument pledged by the Clearing Member. The collateral value is calculated based on market price discounted by a certain percentage. Furthermore, KPEI performs valuation for each collateral by calculating the haircut value and the percentage of eligible collateral as well as restrictions limit set for the collateral instrument.
For a complete explanation on the collateral, please refer to KPEI Rule Number II-12 on Collateralization and KPEI Circular Letter Num. SE-003/DIR/KPEI/0612 on Risk Parameters.