Eligible Bond Connect Securities Collateral

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On 9 July 2024, the People’s Bank of China (“PBOC”) announced to support offshore investors to use Chinese Government Bonds and Policy Bank Bonds in the China Interbank Bond Market traded via Bond Connect (collectively named as “Eligible Bond Connect Securities”) as margin collateral for Northbound Swap Connect transactions. OTC Clear Hong Kong Limited (“OTC Clear”) is pleased to announce such initiative has been implemented on 13 January 2025.

Q2

How can Eligible Bond Connect Securities be used to cover OTC Clear margin requirements?

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A Clearing Member (“CM”) will be able to provide Eligible Bond Connect Securities as margin collateral to satisfy initial margin (“IM”) requirements of Northbound Swap Connect transactions, for its House Position Account and Client Clearing Category 1 Position Accounts^*.

_{* A Client Clearing Category 1 Position Account is a book-keeping account opened by a CM with OTC Clear in order to book contracts in respect of its Client Clearing Services provided to a single client only (Individual Segregation Account). Please note OTC Clear will not accept CM to provide Eligible Bond Connect Securities collateral to satisfy IM requirements in respect of a Client Clearing Category 2 Position Account (Omnibus net segregation).}

Q3

How to determine the maximum amount of Eligible Bond Connect Securities that can be posted by a CM as accepted margin collateral?

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OTC Clear will implement control procedures to manage the amount of Eligible Bond Connect Securities posted by the respective CMs to cover Swap Connect IM requirement. OTC Clear will determine (i) the net IM requirement for all products, (ii) the Swap Connect IM share^* and (iii) a buffer (20%) on a monthly basis for each position account (illustrated in the table below) so as to determine the maximum amount of Eligible Bond Connect Securities accepted as margin collateral for each CM.

OTC Clear will inform CMs about their updated maximum amount of Eligible Bond Connect Securities accepted as margin collateral on the first Hong Kong business day of each month.

_{* The Swap Connect IM share represents the highest ratio of Swap Connect IM to gross IM of all trades over the previous month.}

Q4

What is the custodian arrangement for Eligible Bond Connect Securities?

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The Central Moneymarkets Unit (“CMU”) will continue to be the dedicated offshore central securities depository (“CSD”) for Eligible Bond Connect Securities as per current Bond Connect arrangement. OTC Clear will set up a segregated Margin Collateral Account for each CM and each client at CMU for holding their Eligible Bond Connect Securities posted as collateral.

Q5

What is the documentation requirement for posting Eligible Bond Connect Securities collateral to OTC Clear?

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For House business, same as current practice in providing other types of non-cash collateral (i.e. UST, EFBN and MOFB), CM must execute a Deed of Charge for House Collateral Account with OTC Clear and provide Eligible Bond Connect Securities as margin collateral to OTC Clear by way of security interest.

For Client Clearing business, the Clearing Broker must (i) execute a Deed of Charge for the Client Collateral Account with OTC Clear to provide Eligible Bond Connect Securities as margin collateral to OTC Clear by way of security interest, and (ii) enter into a Client Clearing Agreement with the provisions that any non-cash collateral shall be provided by way of full title transfer from the client to the Clearing Broker (Please refer to OTC Clear Rules 817). This is to ensure the Clearing Broker has the full title of the Eligible Bond Connect Securities collateral posted for their Client Collateral Account under the principal model when client’s Eligible Bond Connect Securities are being directly transferred from the client to OTC Clear.

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CMs shall submit non-cash collateral deposit request via OASIS (“Web Portal”) before 17:00 HKT on an OTC Clear Clearing Day with settlement date value next CMU settlement day. CM shall refer to the Web Portal on the deposit request status around 18:00 HKT. If the deposit request is accepted by OTC Clear, CM or its clients shall instruct their Bond Connect custodian to transfer the Eligible Bond Connect Securities to the designated Margin Collateral Account setup by OTC Clear in CMU. The margin balance of the CM or its clients will be updated upon OTC Clear receiving the settlement confirmation from CMU. The transfer shall be instructed on Free of Payment (“FOP”) basis.

Q7

How to instruct the withdrawal of Eligible Bond Connect Securities collateral from OTC Clear account to CM’s / client’s Bond Connect custodian account in CMU?

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CMs shall submit non-cash collateral withdrawal request via Web Portal before 12:00 HKT noon on an OTC Clear Clearing Day with settlement date value on the next CMU settlement day. CMs shall refer to the Web Portal on the withdrawal request status at around 13:00 HKT. Once the withdrawal request is accepted by OTC Clear, CM and/or its clients shall instruct their Bond Connect custodian to receive Eligible Bond Connect Securities from the designated Margin Collateral Account setup by OTC Clear in CMU. The transfer shall be instructed on FOP basis.

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OTC Clear will value non-cash collateral receiving from CMs in its base currency (i.e. Hong Kong Dollar). Similar to other non-cash collateral, different haircut rates are applied to Eligible Bond Connect Securities collateral according to their asset types and remaining time to maturity. Same as the current practice, OTC Clear performs a monthly routine haircut review and adjustment on monthly basis and inform the CMs through circular.

Please refer to Eligible Collateral for OTC Clear webpage for the haircut rates apply to Eligible Bond Connect Securities collateral.

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CM can refer to “WEB IM Collateral” report (RMRP06) and “WEB IM Collateral_C” report (RMRP07) for the Eligible Bond Connect Securities posted for its house and client’s position respectively.

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While operationally OTC Clear recommends CM to substitute their bonds prior to corporate action events, in case CM does not substitute the non-cash collateral from OTC Clear before the scheduled coupon payment date, OTC Clear will pass on the coupon to CM after receiving it from sub-custodian, i.e. CMU.

CMs and its clients shall refer to the “WEB IM Collateral” report (RMRP06) or “WEB IM Collateral_C” report (RMRP07) published on Web Portal for the next scheduled coupon payment date of each security comprising each CM or its client’s non-cash collateral.

Q11

What happens if there are upcoming maturity payments from the Eligible Bond Connect Securities collateral?

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CMs must substitute Eligible Bond Connect Securities collateral from its Margin Collateral Account no later than 5 business days prior to scheduled maturity date. In case redemption proceeds are credited to a CM or its client’s Margin Collateral Account setup by OTC Clear, such redemption proceeds will be subject to the terms of the relevant Deed of Charge and treated as having an applicable haircut of 100 per cent. No interest will be paid by OTC Clear in respect of such redemption proceeds and CM is required to submit a request to effect the withdrawal of such proceeds.

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Existing charges and accommodation fee (i.e. 0.15% per annum) for non-cash collateral will be applicable to Eligible Bond Connect Securities collateral.

CMs can refer to “WEB Monthly Fees” report (STRP07) and “WEB Monthly Fees II” report (STRP08) published on Web Portal on every 5^th business day of the month for the details of the fees.

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OTC Clear will arrange the liquidation of Eligible Bond Connect Securities collateral, if needed, via its appointed liquidation agent, Hong Kong Securities Clearing Company Limited (“HKSCC”), and apply the sale proceeds for the absorption of losses incurred by OTC Clear as a result of the default of a CM.