OTC Clearing Hong Kong Limited (OTC Clear), a subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX) that provides clearing and settlement services for over-the-counter (OTC) derivative transactions, has launched a client clearing service following approval by the Securities and Futures Commission (SFC).
Client clearing has been rolled out ahead of the effective date of the first phase of mandatory clearing in Hong Kong on 1 July 20171. The new service provides OTC derivative market participants that may prefer not to become Clearing Members of OTC Clear with the means to fulfil their mandated regulatory obligations along with the credit and capital efficiency benefits of central clearing through the establishment of a "client clearing" relationship with an existing Clearing Member of OTC Clear that will act as an intermediary, or "broker".
OTC Clear has also received approval from the SFC to allow the acceptance of certain types of high-quality, non-cash collateral from its clearing participants to satisfy their margin requirements to OTC Clear. This enhancement will provide greater flexibility to Clearing Members and their clients and may reduce their funding costs. The assets that OTC Clear will accept initially are US Treasuries, Hong Kong Exchange Bills and Notes and offshore bonds issued by the Ministry of Finance of the People's Republic of China.
With the implementation of new margining rules for derivatives that are not centrally cleared, there is an increasing trend towards the voluntary clearing of OTC derivatives. OTC Clear began clearing USD/CNH (US Dollar/offshore Renminbi) cross currency swaps in August 2016 and has had cleared volume in excess of US$2.5 billion in notional value year to date. Many regional and global banks have expressed strong support for this service due to the capital efficiency from clearing of USD/CNH cross currency swaps.
"The launch of client clearing will enable financial institutions in the region that are not OTC Clear Members to enjoy the capital efficiencies of central clearing," said Calvin Tai, HKEX’s Head of Clearing. "Members will benefit from an increase in clearable trades as our potential customer base is now much larger. We see client clearing as a good new business opportunity for Members given the advantages of central clearing for financial institutions."
About OTC Clear
OTC Clear is a recognised clearing house under section 37 of Hong Kong's Securities and Futures Ordinance (SFO) and is designated as a central counterparty, or CCP, for the purposes of part IIIA of the SFO in respect of certain OTC derivative products. It is also recognised as a third country central counterparty by the European Securities and Markets Authority, which allows clearing houses located outside the European Union to offer clearing services to certain European financial institutions. In addition, OTC Clear has obtained an order of exemption from registration as a Derivatives Clearing Organization (Exempted DCO status) from the US Commodity Futures Trading Commission that allows it to admit US banks as clearing members and is recognised as a prescribed facility under the regime for mandatory central clearing of OTC derivatives in Australia.
OTC Clear currently offers clearing services for interest rate swaps (IRS) denominated in Hong Kong Dollars, offshore Renminbi, US Dollars, and Euros, non-deliverable IRS in Renminbi (also known as seven-day repo swaps), cross currency swaps in the US Dollar / offshore Renminbi currency pair and non-deliverable currency forwards, or NDFs, referencing Renminbi, Taiwan Dollars, Korean Won and the Indian Rupee. OTC Clear currently has 13 clearing members, including six Hong Kong subsidiaries or branches of Chinese banks. Several other financial institutions are currently working on clearing membership admission arrangements.
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The clearing obligation in section 101C of the SFO mandates that from 1 July 2017 certain OTC derivatives transactions must be cleared through a central counterparty designated by the SFC. The initial scope of mandatory clearing in Hong Kong will cover transactions in certain standardised interest rate swaps that are denominated in Hong Kong Dollars or one of the G4 currencies (US Dollar, Euro, British Pound and Japanese Yen). In the first phase only transactions between major dealers, likely to be Authorised Institutions, Licensed Corporations or Approved Money Brokers, with an OTC threshold of over US$20 billion are mandated for clearing. |
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