Research Paper/Risk Management of Clearing & Settlement in the Capital Market

Within Jordan Securities Commission (JSC) efforts & duties to regulate & to develop Jordan capital market, mainly control of risks associated with the trading processes in the market, through accrediting international standards & best practices in risk management to secure & to decrease levels of risk in clearing & settlement of contracts of traded securities, capital market institutions represented by (JSC) & in association with the Securities Depository Center (SDC) & the Amman Stock Exchange (ASE), are currently thinking to accredit & to implement the “Code of Financial Brokers’ Credit Limit (Trading Cap) in Securities” in the Jordanian market, to cope with settlement guarantees provided by brokers. Once this “Code” is accredited, capital market institutions will be in full control of risks associated with clearing & settlement in the market of financial obligations resulting from trading thus, protecting investors in Jordan capital market.

The Clearing & Settlement Process taking place via the (SDC) on daily executed trading contracts at (ASE) relies on implementing the “Delivery versus Payment System”. The (SDC) is in charge of specifying the net limit of rights & obligations resulting from total trades made by the broker on behalf of his client. It also settles financial positions resulting from these trades & consequently transfers ownership of securities.

The Settlement Process made by the (SDC) among brokers resulting from their trading in the market is based on two main parts. Firstly, sold securities availability to be delivered by the selling broker to the purchasing broker & Secondly, purchasing broker ability to settle price payments of purchased securities to the buying broker. This Process success is based on two main factors: Securities & Cash. Therefore, settling risks of executed trading processes in the market rely on the occurrence of any disharmony in any of these two factors.

The (SDC) established a Settlement Guarantee Fund that aims to cover the deficit of its broker members. This deficit is connected with the previously mentioned two factors (Deficits in Securities Accounts & Cash Deficits). Brokers in turn, provide specified financial guarantees to the Fund to enable it to achieve its aims.

Capital market institutions are in full control of the First Factor “Securities”, by technically linking the (ASE) & the (SDC) environment, by verifying its readiness & its ability to be delivered to the purchasing broker. This mechanism is available in the trading system that allows it to verify selling orders prior accepting them; it is called “Order Verification”. Selling orders are unacceptable by the system if sold securities are actually unavailable & undeliverable.

The Second Factor “the availability of Cash” represents a broker obligation towards the Settlement Process & what results from his trading in the market. This part is currently covered with guarantees provided by the broker to the Settlement Guarantee Fund. The risk in this Factor is still not fully controlled, since there isn’t a technical mechanism in the trading system that specifies the broker financial obligations of his guarantees provided to the Fund.

From this point of view, we are currently studying to implement the “Code of Financial Brokers’ Credit Limit (Trading Cap) in Securities” to cope with guarantees provided by each broker to the Settlement Guarantee Fund. This so called “Brokers’ Credit Limit (Trading Cap)”, is a widely used regulatory method in capital markets & is one of the instruments to eliminate trading risks in securities. This “Code” focuses mainly on setting a Cap to the broker size of obligations towards settlement, of which is being specified by the size of guarantees provided by the broker to the benefit of the Fund. The broker can raise the limit of the (Trading Cap) whenever he wishes by further guarantees provided to the Fund.

In case we finally agree to adopt this “Code” & accredit it in the Jordanian market, its implementation shall be gradual in accrediting Brokers’ Credit Limit (Trading Cap). Details about this “Code” shall be disclosed at the appropriate time.

It is worthy to mention that accrediting & implementing the Brokers’ Credit Limit (Trading Cap) is considered an essential step towards Commercial Banks entrance as Clearing Members in front of the Settlement Guarantee Fund & on behalf of their clients i.e. brokers. The Bank shall be committed to settle its clients trading processes at a maximum amount specified by the Bank in agreement with his client. This requirement is considered a step to develop Jordan securities market.

Prior implementing & accrediting this new “Code” in the Jordanian market, (JSC) welcomes any suggestions & recommendations that may enrich the outcome of this Research Paper from all its aspects on the addresses provided underneath, of which (JSC) aspires to enhance Jordan capital market & develop it for the interest of all its members & dealers; local & foreign investors alike.

Kindly send us your opinions & recommendations to the following address:

Email: info@jsc.gov.jo.
Fax: 065682615.