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Default Fund

 
HKFE Clearing Corporation Limited (HKCC)

HKCC has established Reserve Funds for the purpose of meeting its obligations as the counterparty in circumstances that the losses arising from one or more Clearing Participants’ default cannot be fully covered by the defaulting Participant’s margin. In HKCC, the resources available to the Reserve Fund comprise Participant’s Deposits, HKCC Participant Additional Deposits (HPAD), interest income of the Reserve Fund, Clearing House's resources appropriated as contributions to the Reserve Fund (equivalent to 10% of Reserve Fund size) and other resources as arranged by HKCC from time to time.

The adequacy of the Reserve Fund is assessed on a daily basis by conducting stress testing and HKCC will require participants to pay such amounts by way of HPAD for the purpose of providing further additional resources to the Reserve Fund. Generally, each HKCC Participant is allowed a HKD1 million HKCC Participant Additional Deposits Credit in arriving at its required HPAD.

A threshold is imposed on the Reserve Fund with reference to the highest Reserve Fund size in the past 10 years.  Reserve Fund additional margin in the amount of net projected loss of the participant in excess of 50% of the Reserve Fund will be collected from the concerned participants should the Reserve Fund threshold be reached.

Reserve Fund Threshold: HKD7.3 billion (effective 1 June 2018).

Key stress testing assumptions are:

  • Price movement assumptions: ±20% applied to key markets* including HSI futures and options and HSCEI futures and options
*The price movement assumptions for HKCC products:
 (a) Equity products: ±13% to ±56% 
 (b) Currency products: ±4% to ±9%
 (c) Interest Rate products: ±30%
 (d) Metal products: ±12% to ±23% 
  • Implied volatilities assumptions: -14% to +43% applied to options contracts key markets* including HSI options and HSCEI options

         *The implied volatilities movement assumptions for HKCC products:
           (a) Equity products: -14% to +43%  
           (b) Currency products: -11% to +38%

  • Counterparty default assumptions:  default of the single largest Participant plus the fifth largest Participant
Level of HPAD required = (Projected Loss from stress testing – Defaulting participants’ Margin and collateral**) ÷ 90% – Basic Elements of Reserve Fund*** Clearing House’s resources appropriated as contributions to the Reserve Fund
 
**   Collateral includes clearing house margin and surplus funds
*** Denotes the existing aggregate value of the Reserve Fund less the total HPAD and Clearing House’s resources appropriated as contributions to the Reserve Fund
 
HKCC will re-calculate the requirements for HPAD of each Participant on the 1st business day of every month and ad hoc recalculation may be made from time to time.
 
HKCC Participants will be required to pay HPAD under either of the following conditions:
  • Under the regular monthly assessment where the existing contributions amount is lower than the required contributions; or
  • Daily risk exposure exceeds 90% of the sum of the existing aggregate value of the Reserve Fund and the aggregate HKCC Participant Additional Deposits Credits utilized by all CPs for one business day

If HPAD is required, HKCC will calculate each Participant’s contribution requirement based on each Participant’s daily average net margin liabilities over the most recent 60 business days.  Each HKCC Participant is allowed a HKD1 million HKCC Participant Additional Deposits Credit in arriving at its required HPAD.  Any HPAD payable by an HKCC Participant will be debited from its House CCMS Collateral Account via the Direct Margin Debiting System by 4:00 p.m. of the 1st  business day after the recalculation, unless otherwise specified by the Clearing House.

 
HPAD may be contributed in the form of non-cash collateral such as Exchange Fund Bills and Notes provided prior approval is obtained from the Clearing House.
 
For more details, please refer to Chapter VII – The Reserve Fund of the Rules of HKCC and Chapter 4 – Reserve Fund Contribution of the Clearing House Procedures of HKCC.

 

The SEHK Options Clearing House Limited (SEOCH)

SEOCH has established a Reserve Fund for the purpose of meeting its obligations as the counterparty in circumstances that the losses arising from one or more Clearing Participants’ default cannot be fully covered by the defaulting Participant’s margin. The resources available to the Reserve Fund comprise Initial Contribution and Variable Contributions made by Participants, interest income of the Reserve Fund, Clearing House’s resources appropriated as contributions to the Reserve Fund (equivalent to 10% of Reserve Fund size) and other resources as arranged by SEOCH from time to time.

The size of the Reserve Fund is monitored on a daily basis by stress testing and the Clearing House shall require Participants to pay such amounts by way of Variable Contributions for the purpose of providing further additional resources to the Reserve Fund.

A threshold is imposed on the Reserve Fund with reference to the highest Reserve Fund size in the past 10 years.  Reserve Fund additional margin in the amount of net projected loss of the participant in excess of 50% of the Reserve Fund will be collected from the concerned participants should the Reserve Fund threshold be reached.

Reserve Fund Threshold: HKD2.7 billion (effective 1 June 2018).

Key stress testing assumptions are:

  • Market movement assumptions: ±22% of stock options market
  • Implied volatilities assumptions: -14% to +43%

  • Counterparty default assumptions:  default of the single largest Participant plus the fifth largest Participant

Level of Variable Contributions required = (Projected Loss from stress testing – Defaulting participants’ Margin and collateral*) ÷ 90% – Basic Elements of the Reserve Fund**  – Clearing House’s resources appropriated as contributions to the Reserve Fund
 
* Collateral includes mark-to-market margin, risk margin and surplus funds
** Denotes the Initial Contributions, interest income, any guarantee, facility and insurance policy

SEOCH will re-calculate the Variable Contributions of each Participant on the 1st business day of every month and ad hoc recalculation may be made from time to time.

SEOCH Participants will be required to pay Variable Contributions under either of the following conditions:

  • Under the regular monthly assessment where the actual Variable Contributions on hand is lower than the required level; or
  • Daily risk exposure exceeds 90% of the existing Reserve Fund size for one business day
If Variable Contributions are required, each Participant's share of the Variable Contribution will be equal to that Participant's share of the average total margin requirement and net premium paid over the most recent 60 business days.  Any Variable Contributions payable by SEOCH Participant will be debited from its House CCMS Collateral Account via the Direct Margin Debiting System by 4:00 p.m of the 1st business day after the recalculation, unless otherwise specified by the Clearing House.
 
Variable Contributions may be made in the form of non-cash collateral such as Exchange Fund Bills and Notes provided prior approval is obtained from the Clearing House.

For more details, please refer to Chapter 4 – SEOCH Participant’s Obligation of the Options Clearing Rules of SEOCH and Chapter 11 – Reserve Fund of the Operational Procedures for Options Trading Exchange Participants of SEOCH.

 


Updated 30 Aug 2019

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