HKEX Subsidiary Launches Clearing Service for Cross Currency Swaps

The new product is in line with strong growth and increasing volumes of RMB derivatives traded offshore.

OTC Clearing Hong Kong Limited (OTC Clear), a subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today launched its clearing service for cross currency swaps (CCS). The step effectively makes OTC Clear the first international clearing house to provide clearing for USD/CNH CCS, which reinforces Hong Kong’s overall position as the premier offshore RMB centre.

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HKEx helps provide a cascade of clearing services for over-the-counter (OTC) derivatives. Central clearing via OTC Clear helps ameliorate some of the current credit and capital restrictions in RMB fixed income and currency derivative markets.

Relatedly, the company also offers clearing services for interest rate swaps (IRS) denominated in renminbi, Hong Kong dollars, US dollars and euros, non-deliverable IRS of offshore renminbi, cross currency swaps of US dollar versus offshore renminbi and currency NDFs, referencing renminbi, Taiwan dollars, Korean won and the Indian rupee.

Commenting on the news, HKEX Chief Executive Charles Li said: “OTC FIC (fixed income and currency) market participants face an increasing range of regulatory-driven balance sheet and capital pressures when trading with certain market counterparts, which central clearing via a well-capitalised, internationally recognised clearing house can help to alleviate.”

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“This service provides immediate tangible benefits to our stakeholders and should lead to a step-change in trading activity for these instruments.  We are pleased to be adding this deliverable currency based product to our OTC Clear product suite,” he added.

OTC Clear is a recognised clearing house under Section 37 of Hong Kong’s Securities and Futures Ordinance. It provides a payment versus payment – or PvP – settlement solution through the Real-Time Gross Settlement system operated by the Hong Kong Monetary Authority, which eliminates so-called “Herstatt”, or settlement risk. Commercial Bank of China (Asia) Limited and Standard Chartered Bank (Hong Kong) Limited are appointed by the firm as the settlement banks to conduct PvP settlement.

Overseas, in addition to its No Action Relief from the CFTC, OTC Clear is recognised as a third country central counterparty (CCP) by ESMA, which allows CCPs located outside the European Union to offer clearing services to certain European financial institutions.

Local demand for CCS clearing

On its first day, the service attracted several transactions with an aggregate notional value of US$120 million. The first transaction was submitted by Bank of China versus The Hongkong and Shanghai Banking Corporation Limited and Industrial and Commercial Bank of China versus Standard Chartered Bank. The other transaction was a trade between Hang Seng Bank Limited and The Hongkong and Shanghai Banking Corporation Limited which reflects a local bank demand for CCS clearing.

All trades are submitted to OTC Clear via MarkitSERV, a trade affirmation platform operated by IHS Markit, a company that provides trade processing services for the OTC derivatives and foreign currency markets.  Some of the trades are being conducted via Tradition (Asia) Ltd, a leading broker in Hong Kong’s inter-dealer broker market.

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