For risk management purposes, HKSCC may isolate a Clearing Participant's Exchange Trades, or Exchange trades in a particular security, from CNS and settle these trades as isolated trades of which HKSCC does not guarantee settlement.
As the settlement counterparty to Clearing Participants and Clearing Agency Participants under the CNS system, HKSCC is exposed to market risk as a result of unfavorable fluctuations of prices of the unsettled stock positions. To monitor and control risk exposure, HKSCC will evaluate the market risk of the unsettled position by reference to the difference between the market value of the stock position and the original contract value. The difference between these two values is called Marks, which is the level of risk expressed in money terms.
All Clearing Participants and Clearing Agency Participants' open CNS stock positions are marked to market daily in Eligible Currencies of the CNS stock positions at day end. CNS stock positions covered by Specific Cash Collateral or Collateral Securities are exempted from marking-to-market. Clearing Participants and Clearing Agency Participants have to pay net unfavorable Marks in form of collateral accepted by HKSCC. Paying net unfavourable Marks by cash must be in Eligible Currencies of the CNS stock positions unless Preferred Single Settlement Currency was selected by Clearing Participants. Marking to market and collection of net unfavorable Marks help to confine HKSCC's market risk to about a single day's market fluctuations.
For further protection, Clearing Participants' open positions are also marked to market at 11 am daily. A tolerance limit of HKD5 million has been established for intra-day Marks payment, which means that Clearing Participants only need to pay Marks in excess of this amount before 2 pm.
(i) To cover market risk as a result of potential unfavourable fluctuations of prices in respect of the unsettled CNS stock positions, Margin will be calculated and collected from Clearing Participants and Clearing Agency Participants pursuant to the margining model in Section 10.10A of the CCASS Operational Procedures.
All Clearing Participants and Clearing Agency Participants' open CNS stock positions are subject to Margin calculation at day end. Margining Position refers to the higher of total cross-day net long CNS stock positions or total cross-day net short CNS stock positions of a Clearing Participant and is computed in the market value of the relevant CNS stock positions.
(ii) Netting of Multi-counter Eligible Securities
For Multi-counter Eligible Securities of the same class of an Issuer, the CNS stock positions in such Multi-counter Eligible Securities, though in different stock codes, will be netted against each other in determination of the Margining Position.
(iii) Collateral Securities and Specific Cash Collateral
Where a Clearing Participant or Clearing Agency Participant wishes HKSCC to reduce the Margining Position for computation of Margin, it may provide to HKSCC the relevant quantity of Collateral Securities representing a part or the whole of a short CNS stock position or the relevant amount of Specific Cash Collateral representing a part or the whole of a long CNS stock position.
A Clearing Participant or Clearing Agency Participant provides Collateral Securities or Specific Cash Collateral to HKSCC represents and warrants to HKSCC that it has title and authority to provide such Collateral Securities or Specific Cash Collateral to HKSCC, free from all liens, charges, encumbrances, equities and all other third party rights of any nature whatsoever.
(iv) Margin Multiplier
The Margin Multiplier will be defined at individual Participant level. It will be determined by HKSCC from time to time by reference to the level of risk exposure of the individual Clearing Participant or Clearing Agency Participant to HKSCC and such other matters as HKSCC may consider relevant.
(v) Favourable Marks Offset and Margin Credit
Favourable Marks resulted from marking-to-market will be applied for offsetting the Margin amount of Clearing Participants and Clearing Agency Participants. A Margin Credit of HKD5 million is granted to each Clearing Participant and applied for Margin calculation. A Clearing Participant is required to pay Margin only when the Margin amount in excess of the HKD5 million Margin Credit.
(vi) Margin Payment
Margin requirement is calculated in Eligible Currencies of the Margining Positions. Clearing Participants and Clearing Agency Participants can pay Margin in form of collateral accepted by HKSCC. If a Clearing Participant selected a Preferred Single Settlement Currency, any Margin payment will be converted to the selected currency at the exchange rate with haircut determined by HKSCC for collection.
(vii) Use of collected Margin to reduce Cash Prepayment
Where a Clearing Participant who has setup a Cash Prepayment Standing Instruction to release securities-on-hold with "CHATS" set as the payment method, HKSCC will reduce the cash prepayment amount by the amount of Margin on CNS stock positions due for settlement on that Settlement Day.
(viii) Intra-day Margin
To mitigate the risk arising from significant movements in other major markets during holidays of the Hong Kong market, intra-day Margin will be called from Clearing Participants when there is more than one calendar day, excluding Saturdays and Sundays, in the Hong Kong holiday period. Intra-day Margin calculation will be processed at 2 pm if the day before holiday is a Settlement Day. Intra-day Margin calculation will be processed at 11 am together with intra-day Marks if the day before holiday is a non-Settlement Day.
(ix) Backtesting and sensitivity analysis
HKSCC performs regular backtesting to evaluate the margin coverage and regular sensitivity analysis to test the sensitivity of the margin model coverage. The latest results as of November 2017 reveal that the model performance is satisfactory. The margin rate coverage using the Hang Seng Index movement as proxy, and margin coverage on selected Clearing Participants’ unsettled positions in Hong Kong Market can achieve single-tailed confidence level of at least 99%.
Collection of Intra-day Marks and Intra-day Margin by CHATS Payment Instruction (CPI)
Clearing Participants can opt for paying intra-day Marks and intra-day Margin by CPIs. CPIs for settling intra-day Marks and intra-day Margin will be issued to Clearing Participants’ Designated Banks when the intra-day Marks or intra-day Margin payment amount exceeds the following amount in respective currencies:
- RMB 10,000
- HKD 10,000
- USD 1,000
For the application of settling intra-day Marks and intra-day Margin by CPI, Clearing Participants are required to complete the form that can be downloaded at the hyper link below and return to HKSCC at the fax number stated on the form.
Standing Instruction for Settlement of Intra-day Marks and Intra-day Margin by CHATS Payment Instruction (CPI) Form
Broadcast Message on Periodic Marks and Margin projection
Based on the latest CNS positions of Clearing Participants and Clearing Agency Participants, three rounds of Marks & Concentration Collateral projection and Margin projection will be generated by means of Broadcast Messages to each Clearing Participant and Clearing Agency Participant at around 2:45 pm, 3:45 pm and 4:45 pm on each Business Day.
If a Clearing Participant selected a Preferred Single Settlement Currency for Marks and Margin payments, the projections will be in the Preferred Single Settlement Currency selected by the Clearing Participant. Otherwise, the projections will be in Eligible Currencies of the Marks, Concentration Collateral and Margin Obligations.
Marks and Margin for Exercised Options Trades (EOT)
EOT which is defined as Clearing Agency Transactions in the General Rules of CCASS will be transmitted from the SEHK Options Clearing House Limited (SEOCH) to HKSCC after the exercise and assignment of Options Contracts. If there are additional Marks and/or Margin requirements after incorporating EOT, Clearing Participants can opt to provide such additional amount either to HKSCC through the regular Marks/Margin collection process at day end, or to SEOCH by their corresponding SEOCH Participants through the SEOCH’s money settlement process on the next Business Day. If Clearing Participants opt to provide EOT Marks and Margin requirements from their corresponding SEOCH Participants, Clearing Participants have to submit the relevant form to SEOCH for such arrangement. The confirmed EOT Marks and/or Margin payments in SEOCH will be transferred to the CCMS accounts of the corresponding Clearing Participants in HKSCC.
A Clearing Participant or Clearing Agency Participant with net long CNS position in a high risk security exceeds the concentration trigger value of HKD5 million and 2 times of its apportioned liquid capital or liquid capital equivalent will be required to pay Concentration Collateral. The long CNS stock position covered by Specific Cash Collateral will be excluded from the determination of net long CNS position. The amount of Concentration Collateral required from a Clearing Participant or Clearing Agency Participant is:
Clearing Participant or Clearing Agency Participant's net long CNS position in a high risk security (in the currency in which the high risk security is traded and settled)
10% (i.e. % of daily market volatility of high risk securities)