Brokers are taking on too much regulatory and collateral risk when they could be leveraging the strengths of other banks, according to one leading custody bank in Hong Kong.
“It is getting more and more challenging for brokers to manage their collateral commitments,” said Barnaby Nelson, head of client development for banks, broker-dealers and corporate issuers in Asia for BNP Paribas Securities Services. “Regulatory and exchange capital commitments are becoming increasingly burdensome. Clearing should be outsourced by brokers in Hong Kong the way that it is in Australia.”
Third-party clearing options entered Australia last year as part of a raft of changes to the market which opened up to competition, including the launch of alternate venue Chi-X Australia.
After reviewing its clearing house risk management procedures, the Hong Kong Stock Exchange (HKEx) believes its current system would be inadequate in the face of major defaults by clearing parties.
In response to these perceived shortcomings, new reforms will introduce a standard margin system and a Dynamic Guarantee Fund at the Hong Kong Securities and Clearing Company (HKSCC) and revise upwards collateral assumptions at the HKFE Clearing Corporation (HKCC) and the SEHK Options Clearing House (SEOCH).
HKEx will also revise certain price movement assumptions in the clearing houses’ stress testing and counterparty default assumptions in the stress testing.
“While there are alternative paths available in Hong Kong to clear cash and derivatives, many people are unaware of their options,” Nelson said, explaining BNP Paribas Securities Services works with clients to better understand how to manage their regulatory commitments.
“Brokers don’t need to wear the risk,” said Nelson. “There are many ways for them to leverage the strengths of other banks – and their balance sheets – if they want to grow in a smart way.”