Broker’s Collateral

In association with the shift to T+3 settlement system, we wish to clarify the concept of broker collateral.

Brokers must post collateral in order to trade. The Collateral in question is to support and protect the market. The Collateral needs to be provided by the Broker and it should be constant and not to be used for settlement purposes.

The Collateral to be provided will be determined by the broker’s average trading value and the minimum collateral is MNT 10 million. The Collateral is to be provided by the Broker. The Collateral ought to be posted in a special account at the Clearing Bank of the Broker. That Special account belongs to the Broker but any withdrawal can only be done with the approval of the MSCH&CD.

Collateral will determine the Trading Limit of the relevant Broker and the trading limit shall be 3 times  the Collateral respectively provided by the Broker. In other words, the broker, who posted the minimum MNT 10 million as collateral, will have a trading limit of MNT 30 million. The trading limit will be deducted by the settlement amount and the exposure with each buy trade. In case  the trading limit is breached the  Broker will need to post more Collateral intra-day, otherwise he would violate the Rules.

Collateral must be provided by the broker himself. There could be one exception to the rule meaning the sum of all outstanding purchases is higher than the trading Limit primarily due to a large trade. In case of an exceptional trade whose value exceeds MNT 1,000,000,000 /one billion tugriks/, if the Broker agrees with the underlying client, such client may pay funds directly into the Collateral Account of the Broker, which will then  be used for settlement on T+3. 30% of the Trading Limit amount needs to be collateralized latest TD+1 in the morning.

Whatever the Broker and the underlying client agree regarding the funding of the trade for settlement purposes the Broker will get debited on Settlement day with the net settlement amount. 

Potentially that net settlement debit will overdraw the settlement account of the Broker, because  the client had paid for a large trade a portion of the trade amount directly into the Collateral Account of the Broker. This should not be a problem for the Clearing Bank because they will have the residual funds to cover the overdrawn Net Settlement Account in the Collateral account - in other words it would only be a daylight overdraft for a few hours same day. 

The next thing which should happen after the SD process has been completed by the MSCH&CD the approval should be given to the Clearing Bank in question to transfer the 'additional collateral' paid in for such a large trade to the Net Settlement Account of the Broker. That would cover the potential overdraft situation.

Another point is that the 30% figure can be changed as necessary and as the market evolves. In addition the collateral requirement percentage can also be configured by individual Broker. There is enough leeway to adjust to the market and the individual Broker behavior once T+3 has been implemented and the market and Broker performance monitored.