Derivatives Clearing Services 
16/03/2016 
 
Clearing Services

HKFE Clearing Corporation Limited (HKCC) and The SEHK Options Clearing House Limited (SEOCH) are the clearing houses for the derivatives contracts traded in Hong Kong Futures Exchange Limited and The Stock Exchange of Hong Kong Limited (Exchanges) respectively.  The derivatives contracts traded in the Exchanges include futures and/or options in equity index, stock, interest rate, currency products and commodity products.  For an updated list of the products cleared by the two Clearing Houses, please refer to Product Information on HKEX website.  Both HKCC and SEOCH act as central counterparties and guarantee settlement of transactions effected by the Clearing Participants (CPs).  In addition, both clearing houses offer clearing services such as post trade management, position management and exercise and assignment.

Details of all derivatives contracts traded are electronically and automatically transmitted to HKCC/SEOCH once they have been validly concluded at the Exchanges.  The related trade records are updated real-time in the Derivatives Clearing and Settlement System (DCASS).  DCASS is an integrated system covering both futures and options products capable of processing high volume.  It also provides a seamless interface for derivatives trading and clearing, which reduces cost through common hardware, software and communication links, further details of DCASS can be found in Clearing System - DCASS on HKEX website.

For those trades which are recorded in DCASS and accepted for novation, HKCC and SEOCH act as the central counterparties (CCP) to both buyers and sellers.  The original contract between the buyer and seller is substituted by two separate contracts: a contract with HKCC/SEOCH as a seller to the original buyer and the other with HKCC/SEOCH as the buyer to the original seller. Being the CCP, HKCC/SEOCH assumes counterparty risks associated with a derivatives contract as long as it remains open.  The obligations of derivatives contracts remain outstanding until they are expired, exercised or assigned.

Therefore, on every trading day, HKCC/SEOCH revalues all the outstanding derivatives contracts (more details about the variation adjustment and margin calculation can refer to the Risk Management Information on HKEX website), computes individual CP’s settlement amount and settles the associated obligations including: premium, margin, variation adjustment and trading fees directly with CPs.

HKCC/SEOCH distributes trade and position details to CPs real-time upon trade registration.  Clearing reports are also produced at the end of each clearing day to facilitate CPs’ operations.

On expiry day, HKCC calculates the profit and loss of each outstanding position according to the contract specification for cash settled product.  For stock options contracts which are physically settled, SEOCH automatically exercises those spot month long positions where their in-the-money amounts exceed certain threshold.  CPs with long positions can select to deny this automatic exercise service and/or issue exercise requests themselves via DCASS.  No position will be kept after the expiration day of the contracts.

Clearing Account Structure

HKCC/SEOCH provides flexible account management services to support CPs’ or their clients’ business needs.  The account mapping mechanism between HKATS and DCASS enable smooth transmission of trades to the corresponding clearing account to facilitate straight-through-processing while positions are aggregated by same account type for CPs’ easy position management.

A spectrum of account types is available to CPs, including House, Market Maker, Omnibus Client and Individual Client Accounts.  CPs can make use of these accounts to segregate their clients’ assets from their own.  Furthermore, CPs can optimize their capital utilization through these accounts as positions in most of these accounts are maintained and margined on a net basis.

Lastly, the Client Offset Claim Account (COCA) helps CPs to record positions of individual clients of offset nature.  Positions are maintained on a gross basis but margined on a net basis.  Therefore CPs must ensure positions in each portfolio for offset claim are belonged to the same client.  COCA allows CPs to manage clients’ positions in one client account without setting up multiple Individual Client Accounts, while still benefit from margin netting.

Real-Time Trade and Position Management

HKCC/SEOCH processes clearing transactions on real-time basis at order level, for example, Exchange Participants can submit clearing instruction when entering orders to close out existing positions, to direct trades into a specific account or even to give up trades to other participants to speed up the position and trade allocation processes.

To cater for clients’ late instructions, CPs can perform post trade instruction on trades matched on previous trading day for account reallocation, position opening/closing request adjustment and give up operation.  Furthermore, CPs can consolidate individual trades to assist client order confirmation on trade day or split a trade resulting from order aggregation into smaller units to assist trade allocation.

HKCC/SEOCH offer position transfer and position net down functions for CPs to manage holding at position level to bypass trade by trade adjustment or to accommodate client request to adjust positions accumulated from previous trading days.  Clearing houses also provide facilities for position closing between fungible contracts, like HSI futures/options and mini-HSI futures/options contracts, HHI futures/options and mini-HHI futures/options contracts.

Connection to DCASS

CPs can connect to DCASS in two ways: using the standardized Windows-based DCASS Terminal software provided by HKEX; and developing customized OMnet Application Programme Interface (OAPI).  The standardized terminal software is designed to support CPs with low to medium clearing volume as it facilitates manual input of post trade activities.

CPs can also develop customized application to connect their back-office system to DCASS through OAPI to enable straight-through-processing which can support high clearing volume.  As information from DCASS will be updated on real time basis, the direct host-to-host connection alternative provided by OAPI can help CPs to improve their operational efficiency and provide better risk management control.  More detailed information can be found in Clearing System - DCASS on HKEX website.

On-Behalf-Of (OBO) Service & Backup Centre

If for technical or other reasons, a CP who has difficulties accessing DCASS through DCASS Terminals or OAPI, it can request HKCC/SEOCH to input post-trade and position management instructions on its behalf (OBO Service) before the relevant cutoff time or apply for the use of DCASS Backup Centre two hours before the System Input Cutoff Time.