The short-term bond system
The Short-Term Bond System (hereinafter only the "SKD"), operated by the Czech National Bank (hereinafter only the "CNB") is a system which ensures a separate record (register) of securities and a settlement system for trading in the securities included therein. In the SKD, records are kept of and transactions are settled in securities issued by the Czech Republic (i.e. by the Ministry of Finance of the CR) with maturities of up to one year, short-term securities issued by the CNB with maturities of up to six months, and other bonds with maturities of up to one year. All the securities are issued in the Czech currency and in book-entry form.
Basic functions of the SKD
The SKD ensures in particular keeping of records of securities by issuer and by owner, as well as a record of SKD participants, primary sale of government bonds, CNB bonds and other short-term bonds within the framework of the SKD, execution of participants' instructions for the registration of facts relating to the securities within the SKD, settlement of securities transactions within the SKD, redemption of bonds and the pay-out of yields on them. Within the framework of the SKD, an option to use various auction algorithms when covering investors' orders in an auction is offered. The SKD gives banks access to intraday credit, which the CNB extends through the CERTIS system.
SKD participants - agents, clients and custodians
In terms of operation of the SKD, its participants are divided, since 1 July 2005, into agents, clients and custodians. The clients and the custodians participate in the activities of the SKD through the agents. At the close of 2014 altogether 54 clients, 10 custodians and 86 asset accounts were registered in the SKD.
The client is a legal entity or natural person with which the CNB has concluded a contract on an owner account in the SKD, in which securities in the client's ownership are recorded. The client may have one or multiple owner accounts in the SKD and has access to each of them via the agent specified in his contract.
The custodian is a legal entity with which the CNB has concluded a contract on a client account in the SKD, in which securities in the ownership of persons other than the custodian (the custodian's clients) are recorded. The custodian may have one or multiple client accounts in the SKD. The custodian has access to each client account through the agent mentioned in his contract. The custodian keeps linking-up records of the securities in the owner accounts.
The agent concludes with the CNB an agreement on access to the CNB's communication gateway, in or order to have on-line connection with the SKD, and must also conclude with the CNB a contract on participation in the SKD. The agent must have either his own interbank payment account with the CNB, (hereinafter only the "interbank payment account") or an account with a bank which has an interbank payment account (hereinafter only the "agent's bank"). Within the framework of the settlement ensured by the SKD, the payments of the custodians and the agent's clients are covered from the agent's interbank payment account, with specification of the respective money account stated in the contract on participation in the SKD. The agent is on the basis of his contract on participation in the SKD authorized to provide other participants, custodians and clients, with services relating to their asset accounts and to obtain information relating to them from the SKD. Within the framework of the authorizations contained in his contract on participation in the SKD the agent is also authorized to operate a point of auction. At the end of 2014, a total of 20 agents were registered in the SKD.
Issues of securities
Only a client may issue securities in the SKD. A client who intends to issue securities must use the services of an agent who has access to his asset account. Securities recorded in the SKD may be issued by the CNB, the Ministry of Finance of the CR and also by those clients who have an authorization to issue securities included in their contract and have obtained a permission for the issue from the CNB. The clients interested in an auction submit their orders for purchase of securities of a given issue in electronic form. On auction day, on the basis of the clients' orders placed through the point of auction, information on the distribution of the securities of a given issue among the individual participants in the auction is entered into the SKD, as are the yields at which the primary sale will be executed in the individual cases, in accordance with the procedure stipulated by the issuer. On the issue day, the SKD implements the primary sale of the bonds.
Settlement of securities transactions
Within the SKD, securities transfers - be they for consideration or without consideration - are settled for the clients and custodians on the basis of the instructions given by their agents. The settlement of securities transfers for consideration is executed by the SKD for the clients and custodians in conjunction with the CERTIS system (the CNB's interbank payment system) on the principle delivery versus payment. This involves the transfer of securities from the asset account of the client who is the seller, or the asset account of the custodian in which the seller's security is recorded, to the asset account of the client who is the buyer, or the asset account of the custodian in which the buyer's security will be recorded, and the payment of the agreed-upon purchase price by the buyer to the seller.
The securities settlement process starts with the blocking of the securities in the asset account of the client or custodian. On the basis of this blocking, an order to the CERTIS system (the so-called "third party order") is automatically, without undue delay, created for the transfer of the respective amount from the interbank payment account of the buyer's agent, or the bank of the buyer's agent, with a mention of the respective money account of the agent, to the money account of the seller. The connection between the SKD and the CERTIS system is fully automated and the order is usually executed in a couple of minutes. Once the financial transfer has been completed, the blocked securities are transferred from the asset account, in which the securities of the seller have been recorded until that moment, to the asset account in which the securities of the buyer will be recorded.
Intraday credit for banks
One of the important functions of the SKD is to enable banks that are the SKD clients to obtain interest-free intraday credit, which the CNB extends to them for transactions in the CERTIS system. Depending on the bank's activities, its intraday credit can be increased or decreased arbitrarily at any time between the opening of the SKD accounting day (8.30 a.m.) and the closing of the CERTIS accounting day (4 p.m.). When the bank's intraday credit is increased or repaid, the securities remain in the client's asset account. The client obtains the credit at his own instigation by issuing an instruction to have the securities switched from the "free status" to the status intended for the intraday credit (the "K status"). Immediately thereafter, his intraday credit in the CERTIS system is increased. By switching the securities from the K status to the free status the client issues an instruction for the repayment of the intraday credit.
If the client fails to repay the intraday credit on the basis of his own instruction, at the closing of the CERTIS accounting day the SKD automatically repays the credit to the debit of the bank's money account in the CERTIS system. If the balance in this account is not sufficient to cover the repayment of the intraday credit, instructions for a Lombard repo as a result of non-repayment of intraday credit (the first part and the second part) are automatically created. The first part of the instruction is created automatically and the respective transaction is settled immediately after the closing of the CERTIS accounting day. Based on this, the securities in the K status are transferred to the asset account of the CNB. The second part of the transaction, with the settlement date on the subsequent accounting day, is created only after the CNB has completed the Lombard rate in the respective instruction, which remains in the unfinished status until this happens.
The bank's instructions and transactions relating to the Lombard repo as a result of non-repayment of intraday credit are listed in its Survey of Instructions and its Survey of Settlements. It can display their details, but it does not enter these instructions in the system. The transactions are settled solely on the basis of automatically generated instructions, which are completed by the CNB, and the instructions are not matched with the counterparty.
Security of the SKD
Communication with the SKD is secured using the qualified certificates. Every user uses the qualified certificate for the digital signature of instructions entering into the SKD. The certificates are issued by the accredited certification service providers - public certification authority.