Hong Kong’s SFC approves amendments to recovery plan of OTC Clear

Maria Nikolova

The enhancements to the recovery plan concern voluntary recapitalization and contract termination.

Hong Kong’s Securities and Futures Commission (SFC) has approved the modifications to the recovery plan of OTC Clearing Hong Kong Limited (OTC Clear), a subsidiary of Hong Kong Exchanges and Clearing Limited. In a circular published today, HKEX explains that the approval applies to amendments to the OTC Clear Rates and FX Derivatives Clearing Rules and OTC Clearing Hong Kong Limited Clearing Procedures relating to the enhancements to recovery plan of OTC Clear.

The enhanced recovery plan, along with the rules amendments, will come into effect on October 15, 2018.

The enhancements to OTC Clear’s recovery plan concern voluntary recapitalization and contract termination.

Voluntary recapitalization is an existing recovery tool of OTC Clear, and will be enhanced by specifying the detailed recapitalization mechanism. Under the amended recovery plan, OTC Clear will determine the amount of voluntary recapitalization based on the remaining realized loss out of the default event. If the total amount provided voluntarily by Clearing Members (CMs) is not sufficient, any amounts received will be refunded to the relevant CMs.

Contract termination is currently available in the rulebook of OTC Clear, but it can only be applied under events of force majeure or illegality. Under the enhanced recovery plan, the application of this tool will be expanded to cover situations where OTC Clear is unable to re-establish a matched book after an event of CM default where the auction process is not successful.

This change will allow OTC Clear to terminate some or all open positions, and such termination can be applied to specific contracts, a subset of contracts or all contracts in a particular product or market. In such case, the contracts identified for termination shall be cash-settled with reference to prevailing market prices.

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