HKEx consults on risk and clearing reform

Source: Hong Kong Exchange

Hong Kong Exchanges and Clearing Limited (HKEx) published a consultation paper today (Friday) to seek views on its proposals to reform the risk management framework of HKEx's clearing houses, which is crucial to the long term stability and competitiveness of Hong Kong.

The recent global financial crisis prompted governments, regulators and financial institutions around the world to increase their capital adequacy and risk management standards and to strengthen their risk management frameworks. In Hong Kong, HKEx's experience in connection with the defaults of Lehman Brothers' entities in 2008 underlined the need for HKEx to assess ways to enhance the robustness of its risk management measures and to bring them into line with international standards.

HKEx has reviewed its clearing houses' risk management with particular focus on stress testing assumptions and whether there are sufficient financial resources to support the long term growth of its securities and derivatives markets. The review was conducted with reference to the main international standards setting bodies, the Technical Committee of the International Organisation of Securities Commissions (IOSCO) and the Committee on Payment and Settlement Systems (CPSS). Working closely with its local regulator, HKEx has strived to ensure that the proposed changes meet the evolving international standards for clearing houses.

"We placed great emphasis in ensuring that our proposals are fair, sustainable and meet or exceed international standards. We have also taken into consideration the characteristics and historical volatility of our markets," said Charles Li, HKEx's Chief Executive. "I am confident the enhanced reliability of the risk management framework and our clearing houses resulting from the adoption of our proposals would inspire greater confidence in our markets and encourage market participants to grow their businesses with us."

The main proposals in the consultation paper are to:

1. introduce a standard margin system and a Dynamic Guarantee Fund at Hong Kong Securities and Clearing Company (HKSCC);

2. revise certain price movement assumptions in the clearing houses' stress testing;

3. revise the counterparty default assumption in the stress testingress testing; and

4. revise the collateral assumptions at HKFE Clearing Corporation (HKCC) and the SEHK Options Clearing House.

"The proposals reflect the changing dynamics of our markets and are vital to the strengthening of the risk management framework of our clearing houses," said Kevin King, HKEx's Head of Risk Management. "They also better reflect the risks associated with our market participants' business activities."

The proposals include support from HKEx to reduce the impact of new requirements.

HKEx proposes to introduce:

1. a margin credit of $5 million per HKSCC participant;

2. a Dynamic Guarantee Fund credit of $1 million per HKSCC participant; and

3. Contingent Advance Capital to share half of the HKCC Dynamic Reserve Fund requirement of each HKCC participant.

In addition, HKEx is proposing to set aside additional shareholders' funds of $900 million to boost its support to the clearing houses' financial resources. This additional funding support is not expected to affect HKEx's profitability or HKEx's dividend payout.

Further details of HKEx's proposals are highlighted in the questions and answers and the Clearing House Risk Management Basics.

The consultation paper can be downloaded from the HKEx website. Individuals and organisations interested in submitting their views are encouraged to do so through the questionnaire. The deadline for the submission of comments is 28 October 2011.

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