OTC derivatives transactions clearing services
OTC Clearing Hong Kong Limited (OTC Clear) is a central counterparty (CCP) established by HKEX for the purpose of providing clearing and settlement services for OTC derivative transactions. OTC Clear is a 84.14% owned subsidiary of HKEX with 11 financial institutions as Non-Voting Ordinary Shareholders holding the remaining 15.86% of shares. OTC Clear currently provides clearing of interest rate swaps (IRS), non-deliverable currency forwards (NDF), cross currency swaps (CCS) and deliverable FX (DFX). The list of eligible products cleared by OTC Clear is found here.
Clearing membership
A party that wants to clear proprietary OTC derivatives transactions should initially apply for clearing membership. Prospective Clearing Members are required to fulfill various capital, legal and operational requirements to join the service. Detailed membership requirements are found here.
Connection to the OTC Account Services Information System (OASIS)
OASIS (also known as the OTC Clear Web Portal) is the main communication platform between OTC Clear and its Clearing Members. Through OASIS, Clearing Members can:
- Submit collateral deposit/withdrawal requests to OTC Clear
- Retrieve daily trade, settlement, risk management and market data reports
- Upload trade portfolios to the OASIS Margin Simulator to simulate margin requirements for new trades.
Clearing Members can access OASIS via HKEX’s Securities and Derivatives Network (SDNet/2). The installation procedures for SDNet/2 can be found in this information pack.
Trade submission
OTC Clear has developed the OTC Clearing and Settlement System (OCASS) to support its clearing services. OCASS is an integrated system which processes trade registrations and novations, valuations, trade event management and collateral and margin calculations. OCASS is also the user interface for day-to-day operations and reporting. OCASS has interfaces with three Approved Trade Registration Systems (ATRS), MarkitWire, TradeServ and Traiana, to capture OTC derivatives transactions (excluding Swap Connect transactions). Clearing Members can submit their trades for matching and confirmation through any of the three ATRS. Once matched, trade data is transmitted directly to OCASS. Before OTC Clear accepts a trade for clearing a validation is performed to ensure that the submitted trade satisfies all the product eligibility requirements and that sufficient collateral has been deposited with OTC Clear by the Clearing Member.
For Swap Connect, OCASS has interface with China Inter Bank Market Trading System (CIMBTS) provided by China Foreign Exchange Trade System (CFETS) to capture Northbound Transactions. For further details, please refer to the Swap Connect webpage.
For those trades that are accepted for novation and recorded in OCASS, OTC Clear acts as the CCP to both Clearing Members. The original trade between the two Clearing Members is substituted by two separate trades each facing CCP as shown in the diagram below.
As a CCP, OTC Clear assumes the counterparty risks associated with the trades it clears. OTC Clear’s rights and obligations to the trades remain outstanding until the trades have reached their maturities or are de-cleared from OTC Clear.
Handling of post-clearing processing
After a trade is novated, the following processing is supported by OTC Clear.
OTC Clear has a robust collateral management framework to prudently determine eligible collateral types and control the associated risks. The list of eligible collateral accepted by OTC Clear and the haircuts applied can be found here.
OTC Clear has established a robust risk management framework compliant with international standards, to control credit, market and liquidity risks that may arise in its role as a CCP. More details of the OTC Clear risk management framework can be found here.
- Settlement of obligations and post-trade management
OTC Clear performs rate fixings on cleared trades and calculates the settlement amounts due to participants. OCASS also calculates clearing fees and other settlement obligations like price alignment interest and the interest due on collateral. All the payment / receipt obligations will be advised to Clearing Members and settled net in accordance with the clearing rules and procedures. Details of the OTC Clear settlement process can be found here.
Information on cleared trades is shown in various reports accessed via OASIS. A full list of reports and a guide on their usage can be found here.