Derivatives Settlement Services 
05/07/2017 
 

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. Final Settlement arrangement regarding USD & CNH Physically Settled Gold Futures (“Gold Futures”) is separately set out in the last section of this page.

The settlement processes are mainly comprised of:
(1) Settlement of mandatory intra-day variation adjustment and margin;
(2) Settlement of intra-day VA and margin;
(3) Settlement of day end margin and other money obligations; and
(4) Settlement of additional reserve fund contribution

Any failure to meet any issued calls for variation adjustment and/or margin and additional reserve fund contribution when due may constitute an event of default under the respective Clearing Rules.

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, RMB and USD cash settlement, a number of Settlement Banks are appointed by 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 HKCC and SEOCH do not maintain bank accounts with the Designated Banks, 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 Mandatory Intra-day Variation Adjustment and Margin

HKCC will call for mandatory intra-day variation adjustment and margin (MMC) in respect of the open contracts, including those traded in the After-Hours Futures Trading (AHFT) session of the previous business day, following the market open of the business day.

CPs are required to settle the amounts of variation adjustment/margin obligations. MMC reports are available via Common Collateral Management System (CCMS) for CPs to check the amounts. 

The net settlement amounts due from CPs need to be collected from the CP’s specified bank accounts maintained with their Settlement or Designated Banks.  CPs must ensure that their specified bank account balances are sufficient to meet HKCC payment instructions.  MMC calls should be met by 12:00 noon.

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 in the settlement currency.

Intraday reports are available via 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.

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.  Additional 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.

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 (CNS) System 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.

Settlement of USD & CNH Physically Settled Gold Futures (“Gold Futures”)

Final settlement of a spot month physically settled Gold Futures contract shall be effected by physical delivery of underlying gold by the Selling HKCC Participant and payment of cash in the Settlement Currency by the Buying HKCC Participant.

The matching process will be done based on the net position held in each DCASS account of a HKCC Participant.

In the physical delivery process, the market contracts originally created between: (i) HKCC and the Selling HKCC Participant; and (ii) HKCC and the Buying HKCC Participant will be re-novated and replaced by a new contract between the Selling HKCC Participant and its allocated Buying HKCC Participant. This is subject to: (i) matching of the Selling HKCC Participant to the Buying HKCC Participant; (ii) the earmarking by the relevant Approved Depository of the Selling HKCC Participant’s gold; and (iii) payment into the HKCC’s specified account by the Buying HKCC Participant of its settlement money. Upon re-novation, HKCC will act as a facilitator for final settlement of the Gold Futures Contracts and assist the Selling and Buying HKCC Participants to complete the delivery of gold and the subsequent release of settlement amount.

Upon final settlement, underlying gold will then be transferred from the Selling HKCC Participant’s account to the Buying HKCC Participant’s account with the Approved Depository.

For the payment of the Final Settlement Value, the CCMS Collateral Accounts of Buying HKCC Participants would be debited; any shortfall would be collected from the Buying HKCC Participants by 9:15 a.m. on Final Settlement Day. HKCC will then release the full amount of the payment obligation HKCC received from the Buying HKCC Participants to the Selling HKCC Participants after the underlying gold has been transferred to the Buying HKCC Participants’ account with the Approved Depository.