In the Indonesia capital market, KPEI acts as Central Counterparty (CCP), that is as an intermediary to performing novation on exchange transaction settlement guarantee. Novation is a legal relationship transfer from between selling Exchange Member (AB) and buying AB to a legal relationship between selling AB to KPEI as a buyer and buying AB to KPEI as a seller. Thus, KPEI will always interact with all of AB in guaranteeing the settlement of transactions done by each AB.
The figure below shows the difference between clearing without novation and with novation.
Bilateral Clearing without Novation Clearing with Novation
Buyer ----> Seller
Description for the figure above:
Figure (a) shows several exchange transactions cleared by each EM bilaterally (without CCP). There is no novation process, because there is no change from transaction partner to settlement partner. Selling EM will deliver securities to each buying EM and receive the cash, and vice versa. On the other hand on figure (b), there is a change, where there will be no more legal relationship between EM (called Clearing Member – CM in KPEI), but turned into a legal relationship between the CM with the CCP. CM will only deliver or receive securities or cash from and to the CCP or KPEI. With the presence of KPEI in the exchange transaction clearing process, the exchange transaction settlement process is more efficient.
As mentioned above, the parties entitled to KPEI clearing and guarantee services are called CM or other party (called a Custodian Bank) in accordance with FSA Regulation No.26/POJK.04/2014 about Exchange Transaction Settlement Guarantee. For detailed explanation on Clearing Member and Custodian Bank, click here.
Clearing is the process of rights and obligations fulfillment arising from transactions conducted by EM in the Indonesia Stock Exchange, which will be settled on the settlement date. In carrying out the clearing process, KPEI introduces 2 alternatives:
- Netting; the rights and obligations fulfillment of CM by delivering or receiving a specific amount of securities transacted and to receive or pay a sum of money for all securities traded.
- Per Transaction (trade for trade - TFT); the rights and obligations fulfillment of CM for each selling CM and buying CM transactions done directly per securities transaction .
Selection of clearing methods above will depend on the type of market where the exchange transaction occurs. The Type of market is divided into three, namely the Regular Market, Cash Market and Negotiation Market. Regular market is a market where the exchange transaction results from a continuous auction process by EM and its settlement is 2 trading day after the occurrence of the transaction (T+2). Cash Market is also conducted through continuous auction, but the settlement date is on the same trading day as the exchange transaction (T+0) occurs. Meanwhile, the Negotiation Market is a market where the exchange transaction is executed by direct bargaining individually and not in a continuous auction and settlement is done by mutual agreement between the parties performing the transaction.
Exchange transaction clearing process will produce a Clearing Result List (CRL), which will be sent to CM as the bill for the transaction has been done and must be settled according to the settlement schedule.
The following chart shows the exchange transactions clearing and settlement mechanism: