OTC Derivatives Settlement Services 
20/03/2017 
 

Settlement Types

Clearing Members (CMs) are required to settle the following payment types with OTC Clear:

(1)   Settlement of obligations from cleared trades (Excluding settlement of the Initial Exchange Amount and/or the Final
       Exchange Amount of cross currency swap transactions);

(2)   Settlement of end-of-day variation margin (VM);

(3)   Settlement of price alignment interest (PAI);

(4)   Settlement of the Initial Exchange Amount and/or the Final Exchange Amount of cross currency swap transactions;

(5)   Settlement of initial margin(IM), end-of-day initial margin call (IM call) and holiday margin;

(6)   Settlement of intraday variation margin call (VM call);

(7)   Settlement of voluntary deposits and withdrawals of cash collateral;

(8)   Settlement of Guarantee fund (GF) contributions; and

(9)   Settlement of clearing fees and other relevant fees.

Descriptions of Settlement Types

(1)   Settlement of obligations from cleared trades

For NDF transactions, the obligations refer to the settlement amounts derived after the rate fixings.  For IRS and CCS transactions, the obligations refer to the coupon amounts payable on each coupon date and other additional payments stipulated in the transaction. Those obligations have pre-agreed settlement date in accordance with the terms of the transactions. Obligations due on the same settlement date and same currency will be grouped together and the balance of these obligations will be offset with the balances of (2) and (3) to derive a net settlement amount.  CMs only need to settle their net obligations with OTC Clear thus reducing their overall funding requirement.

(2)   Settlement of end-of-day VM

Cleared trades are marked-to-market regularly and the difference between the mark-to-market (MTM) value and that from the previous clearing day (i.e. end-of-day VM movement) will be settled daily. The value (which can be a gain or loss) will offset with the balances of (1) and (3) to reach a net settlement amount.

(3)   Settlement of PAI

PAI is the overnight cost of funding VM, debited from the receiver of VM and transferred to the payer of VM. The rate at which PAI is calculated is determined by OTC Clear based on market conditions. The PAI value will be offset with the balances of (1) and (2) to reach a net settlement amount.

The net balances of (1), (2) and (3) for payments due from CM's must be settled by 11:00am on the business day of the relevant currency. OTC Clear will settle amounts payable to CM's from 13:00pm.

(4)   Settlement of the Initial Exchange Amount and/or the Final Exchange Amount for CCS transactions

Clearing Members should submit PvP payment instructions and arrange for sufficient funding to effect required PVP payments by 12:00 noon. The PVP payment matching and settlement process will take place between 12:00 noon and 13:00pm.

(5)   Settlement of IM,end-of-day IM call and holiday margin

OTC Clear may issue end-of-day IM calls or holiday margin requests to Clearing Members. Call details are accessible via  OASIS at 8:30am on the following business day and the payment of the call must be settled by 9:30am.

(6)   Settlement of intraday VM call

OTC Clear may issue intraday VM calls to Clearing Members if the mark-to-market value of their OTC derivatives portfolio moves against them. Call details are accessible via OASIS at 2:15pm and the call must be settled by 3:15pm.

(7)   Settlement of voluntary deposits and withdrawals of cash collateral

CMs can place additional cash collateral and withdraw excess cash collateral. They are required to first raise a collateral deposit / withdrawal request via OASIS. The relevant payment will be settled on the same day via RTGS system. CMs are required to raise deposit requests by 4:00pm and withdrawal requests by 11:00am to allow for the settlement of cash collateral on same day.

(8)   Settlement of GF contribution

CMs are required to make guarantee fund contribution to provide a reserve resource for OTC Clear to meet its obligations as a central counterparty (CCP), in additional GF deposit may be required as a consequence of market fluctuations and increased risk exposures.

(9)   Settlement of clearing fees and other relevant fees

Clearing fees and other relevant fees are billed on monthly basis. CMs should pay these fees to the account designated for clearing fee settlement.

Cash Settlement Method

All cash settlements are effected via the Hong Kong inter-bank Real Time Gross Settlement (RTGS) system. CMs are required to be either a member of the RTGS system or hold settlement accounts with a member of the RTGS system. Cash settlement is effected in either HKD, USD, EUR or CNH (offshore RMB). OTC Clear allows CMs to provide cash collateral in any of the four currencies.

Settlements of the Initial Exchange Amount and/or Final Exchange Amount of cross currency swaps must be settled using the RTGS payment-versus-payment (PVP) mechanism.

OTC Clear has appointed several settlement banks to process daily cash payments. Six sub-accounts have been opened for each currency. The details and usage of these settlement accounts is described below.

Table 1: OTC Clear settlement banks

Currency

Settlement Bank of OTC Clear

HKD

Citibank N.A., Hong Kong Branch

CNH (Offshore RMB)

Bank of China (Hong Kong) Limited

EUR

The Hongkong and Shanghai Banking Corporation Limited, Hong Kong

USD

The Hongkong and Shanghai Banking Corporation Limited, Hong Kong

USD and CNH (Offshore RMB) for settlement of Initial Exchange Amount and/or Final Exchange Amount of CCS

Industrial and Commerical Bank of China (Asia) Limited

Table 2: Sub-account structures of OTC Clear

Settlement Account Type

Cash flow settled via the account

Beneficiary Name

Settlement

(1), (2), (3)

OTC Clearing Hong Kong Limited – Settlement

Settlements of Initial Exchange and/or Final Exchange Amount (4) OTC Clearing Hong Kong Limited – Settlement (Notional Exchange)

House Margin Fund

(5), (6), (7) For house account

OTC Clearing Hong Kong Limited – House Margin Fund

Client Margin Fund

(5), (6), (7) For client accounts

OTC Clearing Hong Kong Limited – Client Margin Fund

Guarantee Fund

(8)

OTC Clearing Hong Kong Limited – Guarantee Fund

Fees

(9)

OTC Clearing Hong Kong Limited

Non-Cash Collateral Settlement Method

Clearing Members can also perform voluntary deposit of IM by posting eligible non-cash collateral to custodian account of OTC Clear. OTC Clear has appointed the Central Moneymarkets Unit (CMU) of the Hong Kong Monetary Authority as the custodian of non-cash collateral.