Guidelines on Central Counterparty Clearing of Cross-border FX Transactions
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Attachment: Guidelines on Central Counterparty Clearing of Cross-border FX Transactions Version 1.2 Note: If any inconsistency arises between the English and Chinese versions of the Guidelines, the Chinese version will prevail. Updated on June 27th, 2019 1
Guidelines on Central Counterparty Clearing of Cross-border FX Transactions Table of Contents 1.1 Clearing and Settlement .................................................................................................... 7 1.1.1 Clearing ......................................................................................................................... 7 1.1.2 Settlement...................................................................................................................... 7 1.1.3 Central Counterparty Clearing ...................................................................................... 7 1.1.4 CCP ............................................................................................................................... 7 1.1.5 CCP Clearing of Cross-border FX Transactions ........................................................... 7 1.1.6 Novation ........................................................................................................................ 8 1.1.7 Clearing Membership System and Clearing Participant ............................................... 8 1.1.8 Agreements and Rules................................................................................................... 8 1.2 Risk Management ............................................................................................................. 9 1.2.1 Risk Management Committee ....................................................................................... 9 1.2.2 Margin ........................................................................................................................... 9 1.2.3 Clearing Limit ............................................................................................................. 10 1.2.4 Default Fund ............................................................................................................... 10 1.2.5 Risk Reserve ............................................................................................................... 11 1.3 Account Management ..................................................................................................... 11 1.3.1 Cash Settlement Account ............................................................................................ 11 1.3.2 Margin Account........................................................................................................... 11 1.3.3 Default fund Account .................................................................................................. 11 II. Management of Clearing Participants ........................................................................................ 12 2.1 Application for Direct Clearing Membership and Clearing Participation ....................... 12 2.1.1 First-time Application for Direct Clearing Membership and Clearing Participation .. 12 2.1.2 Application for New Services by Direct Clearing Members (Class-A) ...................... 14 2.1.3 Application for New Services by Direct Clearing Members (Class-B and Class C) .. 14 2.2 Application for General Clearing Membership and Clearing Participation .................... 15 2.2.1 Application for Cross-border FX General Clearing Membership and client Clearing Participation ............................................................................................................................ 15 2.2.2 Application for SHCH General Clearing Membership and Clearing Participation .... 16 2.2.3 Application for Qualification of Proprietary Transaction Clearing by General Clearing Members ................................................................................................................................. 16 2.3 Application for Service Participation by Clients ............................................................. 17 2.4 Information Changes of Cross-border FX Clearing Participants .................................... 17 2.4.1 Information Changes of Clearing Members ................................................................ 17 2.4.2 Changes in Client Information .................................................................................... 18 2
2.5 Cross-border FX Clearing Participant Resigning Service and Membership ................... 19 2.5.1 Clearing Member Resigning Cross-border FX Clearing Service and Membership .... 19 2.5.2 Client Resigning Clearing Service .............................................................................. 20 2.6 Termination of Relevant Qualification by SHCH due to Violation of Rules .................. 20 2.7 Business Preparation ....................................................................................................... 21 2.7.1 Signing Clearing Agreement ....................................................................................... 21 2.7.2 Designating or Opening Account ................................................................................ 21 2.7.3 Application for Clearing Limit.................................................................................... 21 2.7.4 Depositing Margin and Default Fund.......................................................................... 23 2.7.5 Business Training ........................................................................................................ 23 III. CCP Clearing of Cross-border FX Transactions ....................................................................... 24 3.1 Elements of CCP Clearing of Cross-border FX Transactions ......................................... 24 3.2 Intraday Clearing Processing .......................................................................................... 24 3.3 Day-end Clearing Process ............................................................................................... 26 3.4 Settlement Process .......................................................................................................... 27 3.4.1 Margin Settlement Process .......................................................................................... 27 3.4.2 Cash Settlement Process ............................................................................................. 28 3.5 Operations about Default Fund ....................................................................................... 30 3.6 Relevant Rules on Default Management ......................................................................... 31 3.6.1 Default Definition ....................................................................................................... 31 3.6.2 Default Management Procedures ................................................................................ 32 3.6.3 Operational Default ..................................................................................................... 32 3.6.4 Default Termination .................................................................................................... 33 3.6.5 Permanent Default....................................................................................................... 33 3.6.6 Compensation for Default Loss .................................................................................. 34 3.6.7 Use of Risk Resources ................................................................................................ 34 3.6.8 Default Management Group (DMG) ........................................................................... 34 3.6.9 Default Punitive Measures .......................................................................................... 35 3.7 Contingency Operations .................................................................................................. 35 3.7.1 Applicable Range ........................................................................................................ 36 3.7.2 Handling Procedures ................................................................................................... 36 3.7.3 Attentions .................................................................................................................... 37 3.7.4 Contact Information .................................................................................................... 37 3.8 Holidays .......................................................................................................................... 37 3.9 Formulas associated with CCP Clearing of Cross-border FX Transactions .................... 38 3.9.1 Minimum Margin ........................................................................................................ 38 3.9.2 Variation Margin ......................................................................................................... 38 IV. Account Information of CCP Clearing of Cross-Border FX Transactions ............................... 40 3
4.1 Foreign Currency Settlement Account Information ........................................................ 40 4.2 RMB Margin Account Information and Payment Method (High Value Payment System) 40 4.3 Foreign Currency Margin Account Information and Payment Method .......................... 41 4.4 Default Fund Account Information and Payment Method .............................................. 42 4.4.1 RMB Default Fund Account Information and Payment Method (High Value Payment System) ................................................................................................................................... 42 4.4.2 USD Default Fund Account Information and Payment Method ................................. 43 4.5 Payment Account Information of Fees ............................................................................ 44 4.5.1 RMB Beneficiary Account .......................................................................................... 44 4.5.2 USD Beneficiary Account ........................................................................................... 44 Appendices...................................................................................................................................... 45 Application Letter for Direct Clearing Membership of Shanghai Clearing House ......................... 46 Basic Information Form for Clearing Member of Shanghai Clearing House ................................. 48 Application Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House ......................................................................................................................................... 58 Signature Card for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House 63 Instructions for Registered Seals of CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House................................................................................................................................ 65 Letter of Authorization by Legal Representative ............................................................................ 67 Application Letter for General Clearing Membership of Shanghai Clearing House ...................... 69 Application Form for Client CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House .............................................................................................................................................. 71 Signature Card for Client CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House .............................................................................................................................................. 75 Instructions for Registered Seals of Client CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House ................................................................................................................ 77 4
Client Information Form for Client CCP Clearing of Cross-border FX Transactions .................... 79 Registration Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Clearing Member Information Change ........................................................................................... 83 Registration (Filing) Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Client Information (Change) ................................................................................. 85 Application Form for Resigning CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House................................................................................................................................ 87 Application Letter for CCP Clearing of Cross-border FX Transactions Clearing Membership Termination ..................................................................................................................................... 88 Contingency Instruction on CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House .............................................................................................................................................. 90 5
Foreword In order to help market participants understand and participate in Central Counterparty Clearing of Cross-border FX Transactions (hereinafter referred to as "cross-border FX clearing"), further clarify the operation procedures and ensure the smooth processing of cross-border FX clearing, Shanghai Clearing House (hereinafter referred to as "SHCH") hereby formulates the Guidelines on Central Counterparty Clearing of Cross-border FX Transactions (hereinafter referred to as "Guidelines"). The Guidelines are applicable to the cross-border FX clearing services conducted by SHCH. 6
I. Basic Concepts 1.1 Clearing and Settlement Clearing and settlement are two major steps that are processed after financial market transactions. 1.1.1 Clearing There are broad and narrow definitions for clearing. Broadly speaking, clearing means post-transaction processing, namely, transaction matching and confirmation, calculation on payment and delivery rights/obligations, etc., sending of settlement instructions, account settlement for claims and debts and arrival confirmation. On the other hand, a narrow definition of clearing only refers to the process for calculating claims and debts of two parties of the transaction. Clearing or clearing service mentioned in these Guidelines refers to the broad sense. 1.1.2 Settlement Settlement is the process to settle claims and debts between two parties in the transaction and to confirm that payment has been received. 1.1.3 Central Counterparty Clearing Central Counterparty Clearing (CCP Clearing) refers to that clearing participants submit their transactions to SHCH, who shall be responsible for matching and confirming transaction, calculating clearing participants' debts and claims, sending settlement instructions, and conducting account settlement for debts and claims. SHCH establishes clearing membership system, margin system and other risk management mechanisms and is liable for guaranteeing performance. 1.1.4 CCP Central Counterparty refers to an institution that steps in two trading parties in one or more markets, acts as a seller to every buyer and a buyer to every seller and undertakes to performance all exposed contracts. 1.1.5 CCP Clearing of Cross-border FX Transactions Cross-border FX clearing is the CCP clearing service provided with respect to foreign currency pair spot transactions concluded between and by institutions located in the mainland of the People`s Republic of China (hereinafter referred to as "domestic institutions") and institutions located outside the mainland of the People`s Republic of 7
China (including Hong Kong, Macao and Taiwan) (hereinafter referred to as "overseas institutions"). 1.1.6 Novation Novation means the establishment of two new contracts by a CCP who acts as the seller to original buyer and the buyer to original seller, and pays off initial debts between original seller and buyer. 1.1.7 Clearing Membership System and Clearing Participant SHCH's cross-border FX clearing is conducted based on a layered clearing mechanism, which is also called Clearing Membership. The participants of cross-border FX clearing services can be divided into clearing members (hereinafter referred to as "CMs") and non-clearing members (also referred to as "clients"). CMs are categorized into direct clearing members (hereinafter referred to as "DCMs"), general clearing members (hereinafter referred to as "GCMs") and special clearing members (hereinafter referred to as "SCMs"). DCMs only conduct cross- border FX clearing for proprietary transactions while GCMs conduct cross-border FX clearing for both proprietary transactions and client transactions. SCMs are other clearing members approved by SHCH to participate in cross-border FX clearing services. CMs need to sign CCP Clearing Agreement (hereinafter referred to as "Clearing Agreement") with SHCH. Clients do not have qualification of CMs, and need to participant in cross-border FX clearing through GCMs indirectly, sign Client Clearing Agreement with GCMs, and register records with SHCH. 1.1.8 Agreements and Rules Clearing Agreements are legal documents signed between SHCH and their CMs, to specify CMs' qualifications, and rights and obligations of two parties with regard to cross-border FX clearing services. Market participants should sign Clearing Agreements when applying for CMs. In the event of change of its own name, a market participant shall sign a new Clearing Agreement, or notify SHCH of the change in a manner recognized by SHCH, and continue to perform all rights and obligations under all signed agreements. Client Clearing Agreement refers to a legal document signed between a GCM 8
and one of its clients, to specify rights and obligations of two parties when GCM's client participates in cross-border FX clearing. The Client Clearing Agreement shall contain all essential terms and conditions drawn up by SHCH. Before a client participates in cross-border FX clearing, its agent, i.e., a GCM shall file the Client Clearing Agreement signed with such client with SHCH. Business rules are documents developed according to national laws and regulations and department rules and regulations, approved by competent authorities, and observed by all cross-border FX clearing participants, to standardize the aforesaid clearing services in SHCH, manage clearing risks, improve clearing efficiency and protect legal rights of participants. 1.2 Risk Management The risk management framework of SHCH consists of Risk Management Committee, layered clearing member system, margin, default fund, mark-to-market, back testing and stress testing, risk reserve and default management, etc. It provides an effective system guarantee to measure, monitor and manage potential risks, to ensure that risk resources are sufficient, either under normal or extreme market conditions, to cover all potential risks associated with cross-border FX clearing and block risk spreading to ensure the stability of OTC financial market. 1.2.1 Risk Management Committee Risk Management Committee comprises professionals from SHCH and experts from competent authorities, academic community and market institutions. The committee is responsible for reviewing and approving all significant rules and mythologies regarding risk management. 1.2.2 Margin Cross-border FX clearing margin refers to cash deposited by CMs to SHCH, used to compensate losses incurred by SHCH due to default and violation of rules by CMs. There are three types of margins, i.e., minimum margin, over-limit margin and special margin. Minimum Margin. Minimum margin is the cash provided by CMs in advance, based on SHCH's requirements. 9
Over-limit Margin. Over-limit margin is calculated based on the net clearing value. SHCH is entitled to require a payment of over-limit margin from CMs when the net clearing value (the sum of daily net clearing value) exceeds clearing limit. Special Margin. Special margin is the additional margin called by SHCH from a CM in the event of extra mark-to-market loss of such CM or other extreme circumstances. Margin Requirement. Margin requirement refers to the total amount of margin that a clearing participant must pay for the purpose of participating in cross-border FX clearing. SHCH calculates each CM's margin requirement and all CMs should furnish it with margin in a full and timely manner according to SHCH’s requirement. 1.2.3 Clearing Limit Clearing Limit acts as a risk parameter to manage a clearing participant’s risk, and to measure a CM's margin requirement and default fund. CMs should calculate their own limits and apply to SHCH for registration or adjustment and SHCH may provide proper assistance for CMs. SHCH has the right to adjust clearing limits for clearing participants based on actual circumstances. 1.2.4 Default Fund Default fund is a cash asset provided by CMs for the purpose of participating in cross-border FX clearing. It is an important component of risk resources used to cover possible loss due to margin asset deficiency of CMs who have defaulted on cross-border FX clearing. The total amount of default fund collected by SHCH is determined by stress testing, which calculates the uncovered loss generated by the default of the two largest CMs at the same time under different stress scenarios. For each stress scenario, such uncovered loss is equal to the difference between total loss of the two largest CMs and the total margin amount of these two. The stress testing result is the largest uncovered loss calculated under different scenarios. The proportional default fund payable of the total default fund amount by each CM is determined by its daily net clearing value or clearing limit. The default fund is interest-bearing, and SHCH pays interest on a quarterly basis to CMs. 10
1.2.5 Risk Reserve Risk reserve is special fund withdrawn by SHCH from its main business revenue based on a certain ratio. It is used to cover losses incurred due to material CM default as well as losses caused by material risk events associated with clearing activities conducted by SHCH. 1.3 Account Management 1.3.1 Cash Settlement Account A cash settlement account is the FX settlement account designated or opened by a CM for participating in cross-border FX clearing, and used to conduct cash settlement involved in the aforesaid clearing. When applying for participation in cross-border FX clearing, CMs may authorize FX settlement banks to directly debit or credit to the designated cash settlement accounts. CMs complete cash settlement through the FX settlement banks designated by SHCH. Both SHCH and CMs shall have opened FX cash settlement accounts in such FX settlement banks. CMs can open their FX settlement accounts either in designated domestic branches or overseas branches of the settlement bank. 1.3.2 Margin Account It is used to manage and settle margins deposited by a CM. SHCH opens margin accounts for each CM. 1.3.3 Default fund Account It is used to manage and settle default fund deposited by a CM. SHCH opens a default fund account for each CM. 11
II. Management of Clearing Participants SHCH adopts a clearing membership system for cross-border FX clearing services. The participants include Direct Clearing Members (DCMs), General Clearing Members (GCMs), Special Clearing Members (SCMs) and Non-Clearing Members (or clients). This Chapter deals with application and modification procedures related to clearing membership and cross-border FX clearing services. In order to participate in the cross-border FX clearing service, steps are detailed as below: applying for SHCH clearing membership; signing Clearing Agreement; submitting copies of all Client Clearing Agreements to SHCH for filing (applicable to GCMs); designating or opening relevant accounts; applying for clearing limit; depositing minimum margin and default fund in full amount; paying clearing membership fees; assigning staff members with corresponding business capabilities engaged in the services hereunder. 2.1 Application for Direct Clearing Membership and Clearing Participation 2.1.1 First-time Application for Direct Clearing Membership and Clearing Participation First-time applicants who meet the requirements of SHCH may apply for Direct Clearing Membership of SHCH, and apply for the qualification to participate in cross- border FX clearing. To meet basic criteria, an applicant must: (1) be a legally registered legal entity or other entity; (2) meet the standards set by SHCH with respect to net assets (net capital for securities companies) over the last two financial years; (3) meet internal rating standards set by SHCH for cross-border FX clearing service participation; (4) possess relevant business management system, risk management system and technical systems to support cross-border FX clearing (proprietary transactions) operations; (5) obtain relevant operation qualifications; (6) have at least three staffs engaged in proprietary clearing, and with corresponding business capabilities; (7) comply with relevant rules stipulated by regulators, without any record of violation of laws or regulations for two years prior to application, and without any 12
record of major default with respect to risk management; (8) have fairly sustainable operation capability, without any record of close-down, custody, take-over, reorganization, or other events that may affect sustainable operation capability by administrative, judicial or regulatory agencies. An applicant shall submit the following documents: A． Application Letter for Direct Clearing Membership of Shanghai Clearing House; B． Basic Information Form for Clearing Member of Shanghai Clearing House; C． A copy of Business License of Enterprise Legal Person after latest renewal (applicable to domestic institutions); D． A copy of Organization Code Certificate (applicable to domestic institutions); E． A copy of Institution Legal Person Certificate (applicable to domestic institutions); F． Documents for proof of institution legal person status (applicable to overseas institutions); G． Copies of documents approving relevant business operations; H． Audited financial statements for the latest two financial years; I． Application Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House; J． Signature Card for CCP Clearing of Cross-border FX Transactions in SHCH; K． Clearing Agreement signed by applicant (in quadruplicate); L． Letter of Authorization by Legal Representative and documents for proof of authorized person's identity; M． Other supplementary documents required by SHCH. All the above-mentioned documents shall be affixed with official seal or signed by authorized person, and Clearing Agreement shall be affixed with legal person's seal or signature. SHCH may notify the applicant to provide further information when necessary. After receiving complete application documents, SHCH shall review and reply in a timely manner. 13
2.1.2 Application for New Services by Direct Clearing Members (Class-A) Class-A DCMs may directly apply to SHCH for participating in cross-border FX clearing, by submitting the following written documents: A． Application Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House; B． Signature Card for CCP Clearing of Cross-border FX Transactions in SHCH; C． Letter of Authorization by Legal Representative and documents for proof of authorized person's identity; D． Other supplementary documents required by SHCH. All the above-mentioned documents shall be affixed with official seal or signed by authorized person. After receiving complete application documents, SHCH shall review and reply within 30 business days. 2.1.3 Application for New Services by Direct Clearing Members (Class-B and Class C) Class-B and Class-C DCMs may apply to SHCH for changing its membership qualification and participating in cross-border FX clearing, by submitting the following written documents: A． Application Letter for Direct Clearing Membership of Shanghai Clearing House; B． Application Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House; C． Signature Card for CCP Clearing of Cross-border FX Transactions in SHCH; D． Letter of Authorization by Legal Representative and documents for proof of authorized person's identity; E． Other supplementary documents required by SHCH. All the above-mentioned documents shall be affixed with official seal or signed by authorized person. After receiving complete application documents, SHCH shall review and reply within 30 business days. As a result of new clearing service participation, if the status of a DCM changes, SHCH shall notify the clearing member of adjusting membership and membership fee. 14
2.2 Application for General Clearing Membership and Clearing Participation 2.2.1 Application for Cross-border FX General Clearing Membership and client Clearing Participation CMs that meet certain requirements of SHCH may apply for Cross-border FX GCMs. To be a Cross-border FX GCM, an applicant must: (1) be a class-A- DCM of SHCH prior to the application; (2) have minimum net assets (net capital for securities companies) of RMB 10 billion for the last two financial years; in cases where net assets (or net capital) requirement is not met but guarantees satisfying certain conditions are provided by the applicant, it shall be deemed as that the net assets (net capital for securities companies) requirement is met (where applicable); (3) be high-ranking in terms of scale for Cross-border FX clearing business; (4) meet internal rating standards set by SHCH for Cross-border FX General Clearing Membership; (5) establish relevant rules and regulations of business management and risk management, and technical systems to support client clearing; (6) obtain relevant business operation qualifications; (7) have an independent team for client clearing with at least four client clearing staff members with corresponding business capabilities; First-time applicants for FX Cross-border General Clearing Membership shall submit the following documents: A． Application Letter for General Clearing Membership of Shanghai Clearing House; B． Copies of documents approving relevant business operations, affixed with official seal or signed by authorized person; C． Application Form for Client CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House; D． Signature Card for Client CCP Clearing of Cross-border FX Transactions in SHCH; E． Clearing Agreement signed by the applicant (in quadruplicate); 15
F． Letter of Authorization by Legal Representative and documents for proof of authorized person's identity; G． Other supplementary documents required by SHCH. SHCH may notify the applicant to provide further information when it is necessary. When applying for another client clearing service, a product-based GCM is required to submit the same documents as mentioned above, except for Clearing Agreement. 2.2.2 Application for SHCH General Clearing Membership and Clearing Participation CMs who satisfy the requirements of SHCH may apply for SHCH General Clearing Membership. To become a GCM, an applicant must: (1) be a product-based GCM prior to the application; (2) have minimum net assets of RMB 20 billion for the last two financial years for banking institutions; have minimum net assets of RMB 10 billion for the last two financial years for non-banking financial institutions; (3) meet internal rating standards set by SHCH for General Clearing Membership. (4) meet other conditions required by SHCH. For more information about materials required for SHCH GCM application, please contact Member Services Department of SHCH via email (member@shclearing.com). When applying for new client clearing services, GCMs are required to submit the same documents as first-time product-based General Clearing applicants, except Clearing Agreement and Application Letter for General Clearing Membership of Shanghai Clearing House. 2.2.3 Application for Qualification of Proprietary Transaction Clearing by General Clearing Members GCMs and product-based GCMs may apply for participating in cross-border FX clearing services (Proprietary Transaction) to SHCH by submitting the following written documents: A. Application Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House; B. Signature Card for CCP Clearing of Cross-border FX Transactions in SHCH; C. Letter of Authorization by Legal Representative and documents for proof of 16
authorized person's identity; D. Other supplementary documents required by SHCH. All the above-mentioned documents shall be affixed with official seal or signed by authorized person. After receiving complete application documents, SHCH shall review and reply within 30 business days. 2.3 Application for Service Participation by Clients Clients can appoint GCMs to act as their clearing agents for participating in cross- border FX clearing services. A client and its GCM should sign Client Clearing Agreement prior to the participation of clearing service by the client, and the GCM should submit the above agreement and Client Information Form for CCP Clearing of Cross-border FX Transactions to SHCH for filing. The list of GCMs which are eligible for Client CCP Clearing of Cross-border FX Transactions is available on SHCH official website via the following path: homepage>> member services>> clearing members>> name list of clearing members. 2.4 Information Changes of Cross-border FX Clearing Participants 2.4.1 Information Changes of Clearing Members In cases where changes of CMs (including DCMs and GCMs) take place in terms of qualifications such as reorganization, restructuring, spin-off and merger, or in terms of basic information such as institution name, legal representative, shareholders, registered capital and business staff members, or where events happen that may affect the cross-border FX clearing services in which CMs participate, such as legal disputes, commercial cases and administrative penalties, the CM shall, within 5 business days after the above-mentioned changes or events take place, complete Registration Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Clearing Member Information Change, affix effective seal1, and submit a scanned copy to SHCH Member Services Department for filing. In cases where basic information of a clearing participant is changed, the CM shall complete Registration Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Clearing Member Information Change before official change, and state effective date of such change. When a CM has a new cross-border FX 1 Effective seal refers to seal left with SHCH by clearing participant or official seal of the legal person. 17
clearing product, SHCH shall review application within 20 business days and notify the CM in written form. In cases where information of client-terminal administrator is changed, the CM shall complete Registration Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Clearing Member Information Change, affix effective seal before official change, and submit a scanned copy to SHCH Member Services Department. In cases where clearing limit is changed, the CM shall complete Registration Form for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House Clearing Member Information Change, affix effective seal before official change and submit a scanned copy to SHCH Member Services Department. In cases where signature card is changed, the CM shall complete Signature Card for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House (applicable to DCMs) or Signature Card for Client CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House (applicable to GCMs), affix effective seal and submit a scanned copy to SHCH Member Services Department. Forms related to CM information change are available on SHCH official website via the following path: homepage>>member services>>clearing members>>guidelines on application for clearing membership>>related forms, or accessible via email to SHCH Member Services Department (member@shclearing.com). 2.4.2 Changes in Client Information In cases where changes of a client take place in terms of qualifications such as reorganization, restructuring, spin-off and merger, or in terms of basic information such as institution name, legal representative, shareholders, registered capital and business staff members, or in terms of information related to cross-border FX clearing services, the client shall apply for information change to its GCM who acts as its clearing agent. If the GCM accepts such application made by this client, the GCM shall then fill in Registration (Filing) Form for Client Information (Change) for CCP Clearing of Cross- border FX Transactions of Shanghai Clearing House and submit it to SHCH Member Services Department. A client can change its GCM at its own discretion. If the client changes its GCM, 18
it shall settle liabilities and claims with its former GCM. In this case, the former GCM shall submit Registration (Filing) Form for Client Information (Change) for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House to SHCH 3 business days prior to effective date of client clearing termination. The newly-chosen GCM shall submit Client Clearing Agreement signed with the client and Registration (Filing) Form for Client Information (Change) for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House to SHCH before effective date of new relationship, and ensure SHCH receives minimum margin deposited by the client. SHCH shall complete client clearing relationship change for a client after receiving relevant materials. 2.5 Cross-border FX Clearing Participant Resigning Service and Membership 2.5.1 Clearing Member Resigning Cross-border FX Clearing Service and Membership 2.5.1.1 Clearing Member Resigning Cross-border FX Clearing Service A CM may apply for resigning cross-border FX clearing service at its own discretion. In the event of applying for resigning clearing service, the CM shall submit Application Form for Resigning CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House to SHCH, and ensure that there are no liabilities and claims related to this service with SHCH. After receiving Application Form and confirming that all claims and debts with the CM have been settled and cleared, SHCH shall approve the resigning application and complete relevant procedures within one month. If the CM does not settle all of its debts, SHCH is entitled to recover losses from such CM, pursuant to relevant terms and conditions made and signed between both parties. In cases where a CM applies for terminating clearing service qualification, total default fund payable for cross-border FX clearing service (including default fund payable and replenished default fund payable, where the latter is not higher than the former) provided by the CM shall remain the same from the 10th business days after SHCH receives written Application Form till qualification termination date. Clearing service qualification of a CM shall be invalid since the termination date. CM may apply to SHCH for returning margin balance and remaining default fund 19
(including accrued interest) pursuant to relevant provisions in SHCH Administration Principles on Margin and SHCH Administration Principles on Default Fund and Risk Reserve. For a CM, the termination of cross-border FX clearing qualification shall not affect the validity of its other existing qualifications. SHCH shall adjust the type of clearing membership based on SHCH Administration Principles on Clearing Membership. 2.5.1.2 Termination of Cross-border FX Clearing Membership If a CM applies for resigning cross-border FX clearing services, it shall apply for termination of cross-border FX clearing membership. For this, the CM shall submit Application Letter for CCP Clearing of Cross-border FX Transactions Membership Termination affixed with official seal or signed by authorized person to SHCH. SHCH shall complete clearing membership termination procedures and publish a public notice based on SHCH Administration Principles on Clearing Membership. Clearing membership shall become invalid from the date of termination. 2.5.2 Client Resigning Clearing Service A client is entitled to apply to its agent, which is a GCM of SHCH, for resigning cross-border FX clearing service. After approving the resigning application and confirming that all liabilities associated with cross-border FX clearing service are settled with SHCH, the GCM shall submit Registration (Filing) Form for Client Information (Change) for CCP Clearing of Cross-border FX Transactions of Shanghai Clearing House to SHCH. The GCM, as an agent, is entitled to terminate service qualification of its clients directly, and needs to file the termination with SHCH. 2.6 Termination of Relevant Qualification by SHCH due to Violation of Rules In the event of any rating downgrade, close-down, rectification, take-over, dissolution, liquidation and bankruptcy of CMs, or CMs major violation of SHCH Administration Principles on Clearing Membership and relevant rules (including but not limited to business rules, business guidelines, operation procedures, measures, notices, announcements and guidance, etc.), SHCH has the right to restrict, suspend or 20
cancel members' qualification for participating in CCP clearing of cross-border FX transactions. In some serious circumstances, SHCH can directly terminate clearing membership. In cases where SHCH decides to terminate clearing membership, SHCH shall complete termination procedures and claim unsettled liabilities and related unpaid fees. Clearing membership shall become invalid from the date of termination. 2.7 Business Preparation 2.7.1 Signing Clearing Agreement Market Direct Clearing General Clearing Client Participant Type Member Member Signing Client Clearing Agreement with GCM and Name of Clearing Agreement Clearing Agreement the GCM shall file such Agreement Client Clearing Agreement with SHCH 2.7.2 Designating or Opening Account 2.7.2.1 Cash Settlement Account A CM shall open FX settlement accounts to settle principals with respect to cross- border FX clearing service, in a FX settlement bank which is eligible for cross-border FX clearing. CMs can open their FX settlement accounts either in designated domestic branches or overseas branches of the settlement bank. SHCH will have all CMs informed of SHCH's cash settlement account opened in a settlement bank. 2.7.2.2 Margin Account Margin account is used for the management and settlement of margin deposited by a CM. After the margin account is opened, SHCH shall send a Notice of Margin Account Opening within the next business day to the corresponding CM. 2.7.3 Application for Clearing Limit 2.7.3.1 Application for and Adjustment of a Clearing Member's Clearing Limit A CM shall calculate its clearing limit for cross-border FX clearing service and apply for the clearing limit to SHCH. When applying for clearing limit, the CM shall 21
submit Application Form for CCP Clearing of FX Transactions of Shanghai Clearing House to SHCH, specifying details of clearing limit, which include but is not limited to, basic status of relevant business conducted by the CM, basis for such clearing limit, etc. After receiving clearing limit application from a CM, SHCH shall review and determine the clearing limit by assessing the business scale, financial and credit conditions of the CM, and reply with the assessment result in a timely manner. The clearing limit once approved shall become effective from the next business day. A CM may apply for increasing or decreasing its clearing limit based on its own business conditions. In this case, the CM shall submit written application to SHCH and state relevant information about such adjustment. After receiving application for adjusting clearing limit, SHCH shall reply with evaluated result in a timely manner. The adjusted clearing limit once approved shall become effective from the next business day. SHCH is entitled to adjust clearing limit of any CM on a regular or irregular basis according to actual business conditions. In this case, SHCH shall send notice to the CM 5 business days prior to official adjustment. 2.7.3.2 Application for and Adjustment of a Client's Clearing Limit GCMs shall submit Client Information Form for Client CCP Clearing of Cross- border FX Transactions to SHCH, to register clearing limit of their clients with SHCH. Registration shall be valid if application documents of a client are complete and relevant preparations are finished. Effective registered clearing limit shall take effect from either the next business day of registration or the effective date of institution registration, whichever comes later. In cases where a client's clearing limit is to be adjusted, the GCM shall submit Registration (Filing) Form of Client Information (Change) for CCP Clearing of Cross- border FX Transactions of Shanghai Clearing House to register the limit adjustment. Registration shall be valid if all necessary contents in the Form are complete and the new clearing limit complies with risk management requirements. Effective registered clearing limit shall become effective from either the next business day of registration or effective date of institution registration, whichever comes later. 22
SHCH is entitled to adjust clearing limit of any client on a regular or irregular basis according to actual business conditions. In this case, SHCH shall send a notice to the corresponding GCMs. 2.7.4 Depositing Margin and Default Fund Before commencing cross-border FX clearing service, CMs shall deposit margin and default fund in full and promptly according to the rules of SHCH. GCMs shall require their clients to deposit margin in full and promptly. The margins provided by clients to GCMs are owned by clients, and shall only be used to settle claims and debts as well as defaults generated from cross-border FX clearing services. GCMs shall segregate margins paid by clients from their own assets, and shall not use clients' margins for other purposes. A CM shall directly transfer default fund in full to Default Fund Account designated by SHCH within 10 business days after receiving notice on default fund payment or adjustment. During the period that SHCH handles any CM's default, SHCH does not adjust total default fund payable (including default fund payable and replenished default fund payable) and proportion of default fund payable for all CMs which have not defaulted. Total default fund payable and proportion of default fund payable for such CMs which have not defaulted shall be determined based on the standard 1 business day before the default of the first defaulting CM. Within 90 calendar days (including 90 calendar days), the upper limit of replenished default fund for cross-border FX clearing shall be the total payable default fund determined in accordance with the above standard. 2.7.5 Business Personnel CMs shall ensure relevant clearing staff members have the adequate business capabilities and are familiar with the relevant business requirements in accordance with SHCH. CMs shall arrange relevant clearing staff members to attend business training. CMs are responsible for the conduct of their staff members 23
III. CCP Clearing of Cross-border FX Transactions 3.1 Elements of CCP Clearing of Cross-border FX Transactions Current cross-border FX clearing products accepted by SHCH are listed in Table 1 (T means a trading day and hereinafter the same). Where additional products and currency pairs are added as business develops, SHCH will make a public notice separately. Table 1: Clearing Products Transaction Settlement Currency Pairs Type Day FX Currency Pair Spot EUR/USD,GBP/USD,USD/HKD T+2 Transaction Table 2: Elements of Clearing Products Basic Elements Trading Counterparty Clearing Participants Spot Type Trading Trading Time Not limited Not limited Date Currency EUR/USD,GBP/USD, Trading Exchange rate is accurate to Pairs USD/HKD Price 0.0001 Currency Currency Buying Not limited Selling Not limited Volume Volume 3.2 Intraday Clearing Processing Table 3: Business Hours for Cross-border FX Clearing Date Time Issues 6:00 Market opening Day T 2:00 (+1) Market closing Intraday Generate intraday margin report Within 30 Day T to Day minutes or any Intraday margin payment cut-off time point S-1 (report required time generation noticed by SHCH date) Cut-off time point for margin call 16:00 Margin default judgement 22:00 Generate day-end margin report Day S-1 11:30 Generate settlement report 24
SHCH sends all foreign currencies` cash settlement Before 12:00 details in day S to FX settlement banks USD, EUR, GBP and HKD: CMs send cash in Before 16:00 notices to FX settlement banks (MT210) Note: CMs who transfer-in principals on day S-1. USD, EUR, GBP and HKD: CMs send cash in Before 12:00 notices to FX settlement banks (MT210) Note: CMs who transfer-in principals on day S. Before 15:00 HKD: Cash out notice (MT202) cut-off time point USD, EUR, GBP and HKD: FX settlement bank actively collects cash from accounts of CMs who 9:00-16:30 have cash payables. Note: CMs who have not chosen to send MT202 to FX settlement bank Day S CMs send payment instruction (MT202) to FX settlement banks. Before 16:30 Note: CMs who have chosen to send MT202 to FX settlement banks. USD,EUR and GBP: cut-off time point for cash out 16:30 notice (MT202) USD,EUR, GBP and HKD: Only when receiving all the payables in all currencies for a single CM, 16:45 will SHCH notify FX settlement bank through sending MT202 before 16:45 on day S. Cut-off time point for FX settlement banks to send Day S+1 10:00 MT950 (cash balance statement) Note: The above time points are all UTC+8. Receiving transaction data: After a transaction covered by clearing limit is made between two CMs on a designated electronic platform, SHCH performs real-time novation and receive real time transaction data case-by-case during transaction data receiving period (6:00 on day T to 2:00 next day, UTC+8). Element compliance check. SHCH conducts elements compliance check on received transaction data: The first check item is whether both trading parties are eligible clearing members the second check item is whether transaction data comply with requirements of cross-border FX clearing products. After passing above checks, transaction data shall enter subsequent process. In dealing with data which failed to pass element compliance check, specific reason for such failure shall be indicated in the remark column of transaction data through SHCH client-terminal for CMs' inquiry. Clearing confirmation. SHCH confirms all the transactions concluded on a 25
designated electronic platform in default mode. Where any CM holds any objection for a transaction, the CM may telephone SHCH to check the details. Where no objection is raised before netting, it is deemed that no objection will be raised for the transaction. Clearing data inquiry. CMs may query clearing data through SHCH client- terminal in a real time manner, and export the data in Excel formats. 3.3 Day-end Clearing Process Day-end clearing progressing steps include netting, and generation of margin reports and settlement reports, etc. Margin report: Margin reports include day-end margin reports and intraday margin reports, which are effective certificates for SHCH and CMs to deposit and withdraw margins. Day-end margin reports can be downloaded in PDF or EXCEL formats and sent through SWIFT. Intraday margin report can be downloaded in PDF formats. Day-end margin report is generated once on every business day. CMs should deposit and withdraw margins within stipulated time. If intraday market price fluctuates abnormally or in the case of consecutive holidays, SHCH has the right to recalculate special margin in a real time manner and send intraday margin reports to CMs. Intraday margin reports can be generated many times per day. CMs should deposit required margins before stipulated time. Settlement reports. SHCH calculates cash payable and receivable of each CM, and generates settlement reports according to netting results. Settlement reports are effective certificates for SHCH and CMs to complete principal settlements. CMs can query and download settlement reports in PDF, Excel and XML formats after 11:30 on day S-1, and the settlement reports can be sent through SWIFT. Settlement reports are provided in English and Chinese and subject to the Chinese version. CMs check the netting results, and if no error is found, can prepare cash for settlements, and if any inconsistent data is found, shall notify SHCH through telephone or other means on the same day. In this case, two parties attempt to find the cause and make timely correction. Failure of notification within required period will be deemed that no error is found by the CMs. 26
3.4 Settlement Process 3.4.1 Margin Settlement Process i. Deposit of Day-end Variation Margin SHCH makes calculations about day-end variation margin for each CM each day and CMs may download their margin reports through client-terminal after 22:00 (UTC+8), and therefore know the appended amount and released amount of each type of margin. Margin payment cut-off time point is 16:00(UTC+8) on the next business day. Any clearing participant who fails to successfully deposit required margin during required period constitutes of margin default and be subject to margin default management procedures. ii. Deposit of Intraday Variation Margin After SHCH triggers intraday margin call, clearing system will send real-time intraday margin reminder to CMs through client-terminal, and issue intraday margin report. CMs shall transfer required cash, which is determined from the available balance of its margin account and the appended amount specified in intraday margin report to margin account designated by SHCH before the cut-off time point (generally it will be 30 minutes after the intraday margin report is sent). Any CM who fails to successfully deposit required margin during required period constitutes of margin default and be subject to margin default management procedures. iii. Adjustment of Minimum Margin A CM's minimum margin requirement is increased or decreased as clearing limit or other factors change. Where minimum margin requirement is decreased, SHCH will release corresponding margin automatically on the effective date of such adjustment, thereby increasing the available balance of a CM's margin account. Where minimum margin requirement is increased and the available balance of the CM's margin account is insufficient, the CM shall append margin before 16:00 (UTC+8) one business day prior to the effective date. iv. Margin Drawing CMs should submit applications for drawing remaining balance in the margin account through client-terminal and SHCH will transfer the amount available for 27
drawing to accounts designated by CMs on the same day. v. Cash Collateral Margin is denominated in US dollars and may be paid in Chinese yuan, US dollars, Euros or Pound Sterling. At any time, no more than two currencies can be effective as margin asset for each margin account, while only one currency can be accepted for each submission. Exchange rate of each currency as margin asset against US dollars and the discount rate are published by SHCH regularly. 3.4.2 Cash Settlement Process SHCH settles principals in various currencies with CMs based on the generated settlement reports. i. Clearing Process for USD, EUR and GBP (1) Before 12:00 on day S-1, SHCH sends cash settlement details on day S to FX settlement banks which therefore know the amount payable and receivable by SHCH account due on the next business day. (2) CMs who transfer principals through MT202 on day S-1, must send cash in notices to FX settlement banks before 16:00 of day S-1 (MT210). (3) CMs who transfer principals through MT202 on day S must send cash in notice (MT210) to FX settlement banks before 12:00 of day S, and FX settlement banks shall monitor FX cash transferred in the same day, to ensure it is received on day S. (4) CMs pay principals in USD, EUR or GBP to SHCH through FX settlement banks with either of the following two means: 1) A CM directly sends MT202 to FX settlement bank. A CM shall send cash out order (MT202) to FX settlement bank before 16:30 of day S. After receiving such order, the FX settlement bank shall check balance (sum of credit granted from the bank and actual position) of the CM's account: If the balance is sufficient, the FX settlement bank shall transfer the CM's FX cash to FX cash settlement account opened by SHCH in FX settlement bank, and send MT910 to SHCH at the same time. However, if balance is insufficient, FX settlement bank shall reject the order, and notify both SHCH and such CM via email and telephone in a real-time manner. 2)A CM does not send MT202 but authorizes FX settlement bank to collect cash from CM's account, based on settlement details. 28
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