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.”