Using EF Paper as Margin Collateral for Futures, Index Options and Stock Options

The Hong Kong Monetary Authority (HKMA) has conferred the status of Recognized Dealer (RD) for Exchange Fund Bills, Notes and Specified Instruments (EFBN) to the HKFE Clearing Corporation Limited and the SEHK Options Clearing House Limited.

The RD status will allow the two clearing houses to hold EFBNs in their own accounts at the Central Moneymarkets Unit (CMU), effecting efficient transfers and safe self-custody. This will result in increased use of these paper by members of the clearing houses as margin collateral for their positions. Both the HKFE Clearing Corporation and the SEHK Options Clearing House have completed the account opening procedure and submitted a rules amendment application which, when approved by the authorities, will allow members to accept instruments such as HKMA paper from clients as margin collateral.

The use of fixed-income instruments as margin collateral for futures and options positions is the international norm. It reduces capital costs to clearing members as well as asset and liquidity risks for clearing houses. In addition, it promotes market-wide use of the fixed-income instruments (in this case EFBNs), increases the liquidity of the fixed-income market and helps reduce systemic risk.

It is further contemplated that with both clearing houses maintaining direct accounts with CMU, position netting and off-set settlement will become possible, opening another channel for common banking, an important element in cross-margining before the merger of the two clearing houses.

All three organisations regard the HKMA's granting of the RD status to the two clearing houses as a positive move that helps make Hong Kong's financial markets safer and more efficient.

The Hong Kong Monetary Authority
The HKFE Clearing Corporation Limited
The SEHK Options Clearing House Limited

18 March 1999