New rules in Europe (EMIR1
) and the United States (CFTC2
) are affecting existing OTC participants. From 1 March 2017, all in-scope counterparties (primarily financial entities and systemically important non-financial entities) with uncleared OTC portfolios must exchange variation margin daily. This requirement is relatively new for many users of OTC products, and the requirement to exchange initial margin is being made mandatory in stages over time towards full implementation by September 2020.
RMB exchange-traded derivatives provide capital efficiency to investors as a result of their comparative advantages in various aspects vis-à-vis the OTC market. See the table below as comparison between exchange-traded RMB derivative products and OTC products.
|Comparison between RMB exchange-traded derivatives products and RMB OTC derivatives products
|| RMB OTC derivatives
|| RMB exchange-traded derivatives
||Relatively less transparent — Need to contact each counterparty to get the price
||Highly transparent —prices are available on the HKEX website for free, and through information vendors and trading platforms of brokers
|Counterparty credit risk
||Bilateral without central clearing, facing counterparty credit risk of each counterparty
||Central clearing and acting as the counterparty for both sides of transaction, facing only counterparty credit risk of HKCC
||Need to negotiate collateral arrangements with each counterparty
||List of acceptable collaterals is published on HKEX website
| Settlement risk
|| RMB is not an eligible currency in CLS3, therefore cannot utilise the CLS system for payment netting
|| Payment is made to HKCC on a net basis per settlement currency
1 European market infrastructure regulation (“EMIR”) is the regulatory technical standards pursuant to Article 11 European Market Infrastructure Regulation (EU) No. 648/2012 of the European Parliament and of the Council.
2 Commodity Exchange Act of the U.S. Commodity Futures Trading Commission (“CFTC”).
3 Continuous Linked Settlement System — a global clearing and settlement system for cross-border FX transactions