Following positive responses to its market consultation on clearing houses' risk management reform, Hong Kong Exchanges and Clearing Limited (HKEx) plans to implement its key proposals in the third quarter of this year.

HKEx published consultation conclusions on HKEx Clearing House Risk Management Reform Measures today (Sunday).  The consultation paper, which was published on 8 July 2011, drew 626 responses from Clearing Participants (CPs), professional and industry associations, market practitioners and individuals.  Among the 626 respondents, 273 were CPs from the Hong Kong Securities and Clearing Company (HKSCC), the HKFE Clearing Corporation (HKCC) or the SEHK Options Clearing House (SEOCH).

The consultation paper and consultation conclusions are available on the HKEx website along with copies of respondents' submissions.

• Out of all 467 HKSCC CPs, 223 responded to the consultation, representing 83 per cent market share.  72 per cent of CPs by market share expressed full support to all the proposals.
   
• Out of all 163 HKCC CPs, 82 responded to the consultation, representing 92 per cent market share.  72 per cent of CPs by market share expressed full support to all the proposals.
   
• Out of all 64 SEOCH CPs, 44 responded to the consultation, representing 89 per cent market share.  77 per cent of CPs by market share expressed full support to all the proposals.

"I would like to take this opportunity to thank the market for understanding the urgency and necessity of this reform, even though it may bring additional financial obligations to some market participants," said Charles Li, HKEx Chief Executive.  "The reform is a major milestone in enhancing the long term stability and competitiveness of the Hong Kong financial market.  We are pleased to have received positive responses from brokers of different sizes and business nature.  We would not be able to proceed without the support from our market players."

The main proposals in the consultation paper are to:

1. introduce a standard margin system and a Dynamic Guarantee Fund (GF) at HKSCC;
    
2. revise certain price movement assumptions in the clearing houses’ stress testing;
    
3. revise the counterparty default assumptions in the stress testing; and
    
4. revise the collateral assumptions at HKCC and the SEOCH.

To reduce the impact of the new requirements, HKEx will introduce a Margin Credit of $5 million and a Dynamic GF Credit of $1 million for every HKSCC CP, and HKCC Contingent Advance Capital to share half of the daily Dynamic Reserve Fund collectible with each HKCC CP.  These relief measures will be funded by the HKEx Risk Management Capital which, as a result, was increased from $3.1 billion to $4 billion in June 2011.

"We appreciate the market’s guidance and advice as we sought feedback on our proposals," said Kevin King, HKEx Head of Risk Management.  "In addition to the relief measures that came with the original proposal, there are also a number of operational refinements which will be introduced as a result of the market's suggestions.  These refinements will provide additional flexibility to the operation and working capital management of CPs across the three clearing houses."

Implementation of the key proposals, including changing stress testing assumptions for all three clearing houses and the introduction of margining and the Dynamic GF for HKSCC, are scheduled for the third quarter of 2012 subject to system readiness.  Detailed implementation and communication plans will be announced in due course.

Ends