Risk Management System of the Anonymous trading on the RTS Classic Market Sergey Gorbachenko RTS Clearing Center 12th and 14th of October 2005 Saint-Petersburg - Moscow

Average monthly trading volume Groups of Participants Credit Organization Group Own Capital I More than 20 bln. Rubles II More than 5 bln., but less than 20 bln. Rubles III Less than 5 bln. Rubles IV All the other credit organizations   Investment Houses Group NAUFOR Rate Average monthly trading volume I AAA More than $10M II Not lower than АА More than $1M III Not lower than B More than $10T IV All the other investment houses RTS Clearing Rules Supplement №21

RTS Clearing Rules Supplement №18 Limits for Participants Lo Maximum total risk for the participant Lb Maximum volume of unsettled trades without margin Km Average market risk index (0.25) Lt Maximum responsibility of the Clearing Center for the participant F Not reimbursed sum used from the Guarantee Fund (debts the the Guarantee Fund) i Margin level S(i) Deposit at the margin level K(i) Margin ratio of the level RTS Clearing Rules Supplement №18 Supplement №22

RTS Clearing Rules Supplement №21 Limits for Participants (2) Group Lt - Maximum responsibility of CC i - Level of margin K(i) – Margin ratio Maximum volume of unsettled trades S(i) – Amount of money deposited to the margin accounts I $ 1 000 000 Lb $ 20 000 000 $ 0 1 0.25 $ 30 000 000 from $ 0 to $ 7 500 000 2 0.4 $ 50 000 000 from $ 7 500 000 to $ 27 500 000 3 0.5 No limit from $ 27 500 000 II $ 300 000 Lb $ 3 000 000 $ 7 000 000 from $ 0 to $ 1 750 000 $ 10 000 000 from $ 1 750 000 to $ 5 750 000 from $ 5 750 000 III $ 100 000 Lb $ 500 000 from $ 0 to $ 250 000 from $ 250 000 to $ 650 000 More than $ 650 000 is ignored IV Lb $ 0 от $ 0 to $ 400 000 More than $ 400 000 is ignored RTS Clearing Rules Supplement №21

RTS Clearing Rules Supplement №18 Limits for Participants (3) A participant belongs to the Group II. No debts to the Guarantee fund. 1. No money is deposited to the margin accounts Maximum risk exposure is limited to: $3M * 0.25 = $0.75M 2. $1M is deposited Maximum risk exposure is limited to: $0.75M + $1M The sum is less than $1.75M, К(1)=0.25, $1M * 0.25/0.25 = $1M $5M is deposited Maximum risk exposure is limited to: $0.75M + $1.75M + $2.03125M The sum less than $1.75M, К(1)=0.25, $1.75M *0.25/0.25 = $1.75M The sum more than $1.75M but less than $5.75M, К(2)=0.4, $3.25M *0.25/0.4 = $ 2.03125M $8M is deposited Maximum risk exposure is limited to: $0.75M+$1.75M+$2.5M+$1.125M The sum less than $ 1.75 M, К(1)=0.25, $1.75M *0.25/0.25 = $ 1.75M The sum more than $ 1.75M to $5.75M, К(2)=0.4, $4M * 0.25/0.4 = $2.5M The sum more than $ 27.5M К(2)=0.5, $2.25M * 0.25/0.5 = $1.125M RTS Clearing Rules Supplement №18

RTS Clearing Rules Supplement №18 Supplement №20 Limits for Participants (4) A participant belongs to the Group II. No debts to the Guarantee fund. 1. No money is deposited to the margin accounts Trading limit: $3M * 0.25 = $750 000. 2. A trade is executed for 300 000 stocks at $5 per stock with market risk index 0.25 Trading limit: $750 000 – $5 * 300000 * 0.25 = $375 000 The next trading day. Current market price is $5.6 If the stocks were sold: Trading limit: $375 000 – 300000 * ($5.6 – $5) = $195 000 If the stocks were bought: Trading limit: $375 000. Убрать 3-ю колонку, добавить колонку «параметры двухсторонних котировок»: спред в рублях, объем в штуках, добавить цена на 1 марта 2005 года, фрифлоат. RTS Clearing Rules Supplement №18 Supplement №20

RTS Clearing Rules Supplement №18 Limits for Participants (5) Trade Margin Margin of the Buyer Margin of the Seller Price of the trade is less than the current price P P+R Price of the trade is more than the current price Price of the trade is equal to the current price Potential market risk P = Q * Ct * K R Realized market risk R = Q * |(Ct – C)| Q Quantity of stocks Ct Price of the trade K Market risk index of the stock C Current market price Убрать 3-ю колонку, добавить колонку «параметры двухсторонних котировок»: спред в рублях, объем в штуках, добавить цена на 1 марта 2005 года, фрифлоат. RTS Clearing Rules Supplement №18

RTS Clearing Rules Section III Limits for Participants (6) Trading Limit L= Lo - D L Trading limit at the start of the trading day Lo Total maximum risk of the participant  D Margin for all the unsettled trades Then a trade is executed the trading limits is decreased with the trade volume multiplied by the market risk index Then a trade is settled limit is increased with the trade margin. Then some money is deposited to a margin account the trading limit is increased with the change of total maximum risk of the participant. Убрать 3-ю колонку, добавить колонку «параметры двухсторонних котировок»: спред в рублях, объем в штуках, добавить цена на 1 марта 2005 года, фрифлоат. RTS Clearing Rules Section III

RTS Clearing Rules, Section III Margin Calls A participant belongs to the Group II. No debts to the Guarantee fund. 1. No money is deposited to the margin accounts Trading limit: $3M * 0.25 = $750 000. 2. 300 000 stocks are sold at $5 per stock with market risk index 0.25 Trading limit: $750 000 – $5 * 300000 * 0.25 = $375 000 T+1. Current market price is $5.6 Trading limit: $375 000 – 300000 * ($5.6 – $5) = $195 000 Realized market risk of the trade: 300000 * ($5.6 – $5) = $180 000 If the trade is not settled the Clearing Center will have to pay the penalty from its Guarantee fund. The penalty has to cover the realized market risk that is calculated using the current market price of the day then trade is cancelled and the penalty is paid. RTS Clearing Rules, Section III

RTS Clearing Rules, Section III Margin Calls (2) 4. T+2. Current market price is $6.2 Trading limit: $375 000 – 300000 * ($6.2 – $5) = $15 000 Realized market risk: 300000 * ($6.2 – $5) = $360 000 Maximum responsibility of the CC to the participant of the Group II is $300 000 If the trade settlement is failed the Clearing Center will not be able to pay the penalty in full. To prevent such cases Clearing Center uses the Margin calls – the requirements to the Clearing Member to deposit additional margin. RTS Clearing Rules, Section III

Margin Calls (3) MC = R – (S + Lt*Kt – F) MC R S Lt Kt F Sum of the Margin Call (for Groups I-III) R Total realized market risk for all the unsettled trades S Amount of money deposited to the margin accounts Lt Maximum responsibility of the Clearing Center for the participant Kt Margin Call threshold (0.5) F Sum of the debts to the Guarantee Fund If MC>0, then a Margin call is sent to the participant. Margin Call has to be paid before the next trading day. In the above example when the current market price is $5.6: МС = $180 000 -($0 + $300 000*0.5 - $0)= $30 000 RTS Clearing Rules Supplement №21

Margin Calls (4) Margin is called before the trading day (before 10:00am). Margin call is sent to the participant via RTS EDI system as a report which indicates the sum of the Margin Call and the list of the trades that may be cancelled if the Margin Call is not paid. Margin Call has to be paid before the next trading day. If the Margin call is not paid in full then the trades are cancelled (that is the condition of the trade). The trades are cancelled one by one from the earliest until the realized market risk of all the remaining trades is higher than Lt*Kt. For all the cancelled trades the fines and penalties are paid after the trading session. RTS Clearing Rules Supplement №21

Thank you. Questions, please! Contacts: Sergey Gorbachenko Tel: +7 (095) 705-90-31 E-mail: GSG@RTS.RU Web: WWW.RTS.RU