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 and settlement of notional amount of DFX 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 and settlement of notional amount of DFX transactions relevant to a currency pair;
(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 by 2:30pm.
(4) Settlement of the Initial Exchange Amount and/or the Final Exchange Amount for CCS transactions and settlement of notional amount of DFX transactions relevant to a currency pair
In respect to the cash payments relevant to the above-mentioned amounts, they will be settled through the bulk settlement run process for the relevant USD/HKD or USD/CNH currency pair. The bulk settlement run is a money clearing and settlement service linked with the Real Time Gross Settlement system (RTGS) provided by Hong Kong Interbank and Clearing Limited (HKICL) which settles interbank payments through a payment-versus-payment mechanism on a bulk settlement basis.
On a particular payment date, the bulk settlement run for USD/HKD currency pair commences at 11:40 Hong Kong time, and the run for USD/CNH currency pair will commence after the completion of the USD/HKD run, but no earlier than 12:00 Hong Kong time. For each of the runs, the cut-off time for completion is normally 15 minutes since the commencement of the run, and may be extended up to 60 minutes if replacement settlement file handling procedure is triggered and required to be processed by HKICL.
The timetable of the USD/HKD and USD/CNH bulk settlement runs are subject to adjustment in case of the hoisting of Typhoon Signal No. 8 (or above) or Black Rainstorm Signal, or in the event of emergency or exceptional circumstances due to reasons of an operational or technical failure. Clearing Members are advised to refer to the relevant notices provided by HKICL for the updated run times in such situations
(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 5:00pm 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 Real Time Gross Settlement system(RTGS). CMs are required to be either a member of the RTGS or maintain an account with a member of the RTGS. 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 and notional amount of DFX transactions must be settled using the RTGS bulk settlement run 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