Settlement Services
Clearing Participants (CPs) are required to settle premium, fees and any unrealized incremental losses and/or margin obligations with the Clearing Houses every day until the contracts are closed out, given-up, exercised or expired in.
The settlement processes are mainly comprised of:
(1) Settlement of intra-day VA and margin;
(2) Settlement of day end margin and other money obligations; and
(3) Settlement of additional reserve fund contribution
All settlement is effected via SWIFT electronic payment instructions and confirmations such that transactions can be completed efficiently on a timely manner. In addition, to facilitate HKD and USD cash settlement, a number of Settlement Banks are appointed by both HKCC and SEOCH such that arrangement can be made to collect and pay CPs settlement money via internal bank transfer or inter-bank transfer (inter-bank Real Time Gross Settlement “RTGS” System, i.e. CHATS) between CPs’ bank accounts and HKCC/SEOCH bank accounts.
While a CP can choose to open bank accounts with any of the Settlement Banks, it can also opt to maintain accounts with Designated Banks to carry out cash settlement with HKCC/SEOCH. However, since Designated Banks have no direct relationship with HKCC and SEOCH (i.e. HKCC and SEOCH do not maintain bank accounts with them), money transfer to and from HKCC/SEOCH’s Settlement Bank accounts will be conducted through CHATS, between a CP’s Designated Bank account and the specified Clearing House’s Settlement Bank account.
Settlement of Intra-day Variation Adjustment and Margin
When the market is volatile, HKCC and SEOCH will carry out mark-to-market and intra-day margin calculation respectively.
For HKCC, those CPs with intra-day variation adjustment (IDVA) losses are required to settle their obligations by cash in the settlement currency if they have insufficient cash collaterals in their collateral accounts. On the other hand, those CPs who entitle to VA gains are credited with the gain amounts.
As for SEOCH, those CPs with intra-day margin (IDM) shortfalls are required to settle the shortfalls by cash denominated in HKD.
Intraday reports are available via Common Collateral Management System (CCMS) for CPs to check the amounts of intra-day variation adjustment/margin obligations. Intra-day calls should be met by CPs no later than one hour after notification. Any failure to meet any issued calls for intra-day variation adjustment/margin may constitute an event of default under the respective Clearing Rules and the CP concerned may be subject to disciplinary actions.
Settlement of Day End Margin and other Money Obligations
The balances of day end margin, variation adjustment, premium, trading and clearing fees, etc, in each CP’s individual CCMS collateral account are being offset to reach a net settlement amount. CPs only need to settle the net obligations with the Clearing Houses thus reducing their overall funding requirement. The net settlement amounts due from CPs need to be collected from the CPs’ specified bank accounts maintained with their Settlement or Designated Banks. CPs must ensure that their specified bank accounts balances are sufficient to meet the Clearing House payment instructions and the responsible Settlement Banks have to notify the Clearing Houses that the payment had been effected by 9:15 a.m. on the next Business Day.
Settlement of Additional Reserve Fund Contribution
Reserve Funds are established to provide resources to assist the Clearing Houses to meet their obligations as central counterparty (CCP) in circumstances where a CP defaults in its obligations to the Clearing House. Reserve Fund may be collected where necessary in response to market fluctuations and increased risk exposures.
In the event where Additional Reserve Fund contribution is required, CPs concerned are informed in advance and Additional Reserve Fund contribution are collected from the CPs’ specified bank accounts maintained with their Settlement or Designated Banks. Reserve Fund surpluses are released to the CPs’ specified bank accounts / CCMS collateral accounts.
Settlement of Exercised Options Trades
The exercise and assignment of Stock Options contracts will result in purchase and sale of underlying securities between SEOCH and SEOCH Participants (referred to as Exercised Options Trades or EOTs). The day on which the Stock Options contracts being exercised or assigned is regarded as trade day (T) for the resulting EOTs. All EOTs are transmitted to the Central Clearing and Settlement System (CCASS) and are due for settlement on the second settlement day immediately following the trade day (T), i.e. on a T+2 basis according to CCASS settlement cycle.
Delivery obligations in relation to EOTs are settled via CCASS under the Continuous Net Settlement System (CNS) in the same manner as other transactions in the underlying securities market of SEHK. In cases where the underlying securities were used in covering short call positions of a SEOCH Participant, such covered securities might be used to settle the delivery obligations.
Details of EOTs to be settled under the CNS mechanism in CCASS are recorded in CCASS’s Provisional Clearing Statement (PCS) and Final Clearing Statement (FCS) to be issued to SEOCH Participants or their CCASS General Clearing Participants, where appropriate, on T and T+1 respectively. SEOCH Participants can also enquire the DCASS Exercise and Assign Summary about the particulars of EOTs to be settled by covered securities.
