Risk Management of CNS Trades in China Connect Market 
10/10/2017 
 

Mainland Settlement Deposit (MSTD)

To cover the credit risk as a result of China Connect Clearing Participants’ failure to meet its money obligations in respect of the CNS positions in China Connect Securities, HKSCC will collect MSTD from China Connect Clearing Participants pursuant to the methodology in Section 10A.8 of the CCASS Operational Procedures for Shanghai and Shenzhen markets.

(i)

Calculation methodology of MSTD
MSTD requirement in respect of a China Connect Market is the higher of Daily MSTD requirement and Monthly MSTD requirement, where

Daily MSTD Requirement =

Buy turnover

 

Contract value of

             Sell turnover in

 

 

Settlement  

(

in China Connect Securities

+

overdue short positions in China Connect Securities

+

     China Connect Securities for Special Segregated Accounts

)

x

Deposit Rate, currently 20%

Monthly MSTD Requirement =

 

Sum of buy turnover and contract value of overdue short  positions in China Connect Securities on each Trading day in the previous month

Sum of sell turnover in China Connect Securities for Special Segregated Accounts on each Trading day in the previous month

Settlement Deposit Rate, currently

(

_____________________________________

+

________________________________

) x 20%

Number of Trading days having buy turnover in the previous month

Number of Trading days having sell turnover for Special Segregated Accounts in the previous month

If the China Connect Clearing Participant does not have any buy turnover in China Connect Securities on a Trading day, the contract value of any overdue short positions on that day will be excluded from the “Sum of buy turnover and contract value of overdue short positions in China Connect Securities on each Trading day in the previous month”.

 

(ii)

Broadcast message on estimation of MSTD requirement
Based on the latest buy turnover and sell turnover for Special Segregated Accounts in China Connect Securities, estimation of MSTD requirement for Shanghai and Shenzhen markets will be generated separately by means of broadcast message to each China Connect Clearing Participant at around 4:30pm on each Trading Day of China Connect Market.

 

(iii)

Schedule of collection and refund of MSTD
As MSTD requirement is determined daily, any shortfall in MSTD will be collected daily via Day-end Direct Debit Instruction (DDI). Refund on MSTD for Shanghai and Shenzhen markets will be made on a daily basis starting from the day ChinaClear conducts its collection/refund of the relevant deposit from or to HKSCC after its monthly review in respective Shanghai and Shenzhen markets to the last business day of that month, any excess MSTD after daily calculation on the refund days will be refunded via Day-end Direct Credit Instruction (DCI).

Tentative Refund Schedule of MSTD and MSCD (2016)

Tentative Refund Schedule of MSTD and MSCD (2017)

 

(iv)

Refund of MSTD after termination as a China Connect Clearing Participant
After a Clearing Participant terminated as a China Connect Clearing Participant, HKSCC may continue to determine MSTD requirement based on the previous month’s average daily buy turnover, contract value of overdue short positions and sell turnover for Special Segregated Accounts in China Connect Securities. Subject to the corresponding MSTD amount has been returned to HKSCC by the China Connect Clearing House, MSTD is expected to be returned to the Clearing Participant within 3 months after its termination as a China Connect Clearing Participant.

 

(v) Intra-day MSTD
In addition to day-end MSTD, HKSCC determines intra-day MSTD requirement for Shanghai and Shenzhen markets separately of each China Connect Clearing Participant using the same methodology as for day-end MSTD after the morning close of China Connect market.  Unless otherwise determined, a tolerance limit of RMB 5 million for intra-day MSTD payment is granted to each China Connect Clearing Participant.  Any aggregate intra-day MSTD shortfall from Shanghai and Shenzhen markets exceeds the tolerance limit is required to pay in full amount by China Connect Clearing Participants before 2 pm on the same day.

China Connect Clearing Participants can opt for paying intra-day MSTD by CHATS Payment Instructions (CPIs).  To apply for settling intra-day MSTD by CPI, China Connect Clearing Participants are required to complete the form that can be downloaded at the hyperlink below and return to HKSCC at the fax number stated on the form.

Standing Instruction for Settlement of Intra-day Marks, Intra-day Margin and Intra-day Mainland Settlement Deposit by CPI Form

Mainland Security Deposit (MSCD)

To cover the market risk as a result of potential unfavourable fluctuations of prices in respect of the unsettled stock positions in China Connect Securities of China Connect Clearing Participants under the CNS System, HKSCC will collect MSCD from China Connect Clearing Participants pursuant to the methodology in Section 10A.9 of the CCASS Operational Procedures for Shanghai and Shenzhen markets.

 

(i)

Minimum requirement of MSCD
A Clearing Participant is required to pay to HKSCC one minimum amount of MSCD of RMB200,000 for registration as a China Connect Clearing Participant. The minimum RMB200,000 requirement is incorporated in the MSCD calculation of Shanghai market.

 

(ii)

Calculation methodology of MSCD

MSCD Requirement in respect of a China Connect Market =

Sum of daily net settlement amount in China Connect Securities in the last 6 months

_________________________________________________________

x Mainland Security Deposit Rate

Number of days traded in China Connect Securities by the China Connect Clearing Participant in the last 6 months

*MSCD requirement of Shanghai market is subject to a minimum amount of RMB 200,000 while there is no minimum MSCD requirement of Shenzhen market
**MSCD rate is currently set at 16.4% for Shanghai market and 18.5% for Shenzhen market

 

(iii)

Schedule of collection and refund of MSCD
MSCD requirement is determined monthly on the last calendar day of each month, any MSCD shortfall will be collected on the first Business Day of each month by Day-end DDI. Refund of MSCD for Shanghai and Shenzhen markets will be made as soon as practicable after ChinaClear conducts its collection/refund of the relevant deposit from or to HKSCC after its monthly review in respective Shanghai and Shenzhen markets and any excess MSCD after monthly calculation will be refunded via Day-end DCI.

Tentative Refund Schedule of MSTD and MSCD (2016)

Tentative Refund Schedule of MSTD and MSCD (2017)

 

(iv)

Refund of MSCD after termination as a China Connect Clearing Participant
After a Clearing Participant terminated as a China Connect Clearing Participant, HKSCC may continue to determine MSCD requirement based on the previous 6 months’ average daily settlement amount in China Connect Securities Trades. Subject to the return of corresponding MSCD amount to HKSCC by China Connect Clearing House, MSCD is expected to be refunded to the Clearing Participant within 8 months after its termination as a China Connect Clearing Participant.

 

(v)

Usage of MSTD and MSCD
HKSCC shall have the right to satisfy its obligations as a clearing participant to the China Connect Clearing House under the relevant Clearing Link with, or otherwise use, the MSTD and MSCD collected from China Connect Clearing Participants.  

 

Backtesting

HKSCC performs backtesting on a regular basis to assess overall collateral coverage for China Connect Market.  The latest results as of September 2017 reveal that the methodology of collateral requirement performance is satisfactory.  The collateral coverage on China Connect Clearing Participants with respect to their buy positions on China Connect Securities can achieve single-tailed confidence level of at least 99%.