Bursa Clearing (D) eliminates credit risk between clearing participants by becoming a counterparty to each contract which is bought or sold by a clearing participant and giving an undertaking to perform its obligations under such a contract. The performance of this function provides confidence to the market in the financial performance of the contracts.

Process of becoming a counterparty

Upon the creation of market contracts executed on the Bursa Malaysia Derivatives, clearing participants present the contracts electronically to Bursa Clearing (D) for registration. Immediately upon the registration of each market contract, two new contracts i.e. open contracts are created in place of and on identical terms with each market contract. Bursa Clearing (D) becomes the buyer to the clearing participant acting as the seller under one open contract and the seller to the clearing participant acting as the buyer under the other open contract. This process is provided for in the Bursa Clearing (D) Rule 610.

Undertaking by Bursa Clearing (D) 

Bursa Clearing (D), as a counterparty to all open contracts, undertakes to its clearing participants who are party to those contracts that it will perform its financial obligations under the contract. This undertaking is backed by Bursa Clearing (D)’s risk management policies as well as funds held for such purpose. Bursa Clearing (D)’s financial undertaking is provided to clearing participants regardless of whether the clearing participant is acting as a principal or an agent in respect of the relevant open contract. As a corollary to the undertaking provided by Bursa Clearing (D), each clearing participant is liable as a principal for the performance of its obligations under all contracts to which it is a party. Bursa Clearing (D) does not assume or incur any liability to any client of a clearing participant or other third party; neither can Bursa Clearing (D) take any action against a client for the performance of an open contract in its own capacity under the Bursa Clearing (D) Rules.

Bursa Clearing (D) upholds financial integrity through its risk management policies. In addressing and managing credit and market risk, Bursa Clearing (D) has in place the following policies:

Bursa Clearing (D) is of the view that in managing risk a proper balance should be struck between the need for adequate safeguards and the need to encourage trading and increase liquidity in the market. As such, Bursa Clearing (D)’s risk management methodology, especially in relation to margins, is constantly reviewed to ensure that its requirements are neither inadequate nor excessive. The risk management function is carried out on a daily basis by Bursa Clearing (D) and is inherent in its clearing and settlement process. This involves the calculation of margins, settlement-to-market and intra-day margining.

Margin

The collection of margin on all positions held by a clearing participant is fundamental to the operations of Bursa Clearing (D) to protect itself against losses arising from a clearing participant’s default. The margin level is set to cover the maximum one-day price movement (derived from a statistical formula) with a confidence factor of at least 99%. The level of margin is based on historical price volatility, current and anticipated market conditions, and other risk factors.

Bursa Clearing (D) adopts a gross margining concept where each client account of a clearing participant is margined separately. The total margin for a clearing participant is the sum of the margins for all the individual client accounts of the clearing participant. The proprietary position of a clearing participant is margined on a net position.

The following is the list of Approved Collateral for margin coverage:

Any update on the Approved Collateral will be communicated from time to time via Clearing Circulars.

Settlement-To-Market

All open contracts are valued daily against a settlement price determined by Bursa Clearing (D) at the end of each trading day and the resulting gains or losses are posted to each clearing participant's account. The losses must be paid in cash to the Clearing House before the start of trading on the next business day. The gains, if available, can be withdrawn upon request by the clearing participant on the next business day.

In periods of extreme market volatility, Bursa Clearing (D) can activate this settlement-to-market process during the trading day for trades executed up to that point in time. Having two or more settlements-to-market in one trading day effectively changes the duration of Bursa Clearing (D)'s exposure from one day to segments of a day. The losses have to be paid to Bursa Clearing (D) within 1 hour of the intra-day margin call being made. New positions entered into up to that point in the trading day will also have a margin obligation which has to be settled within the hour.

Intra-day monitoring

Security Deposit and Clearing Fund

Bursa Clearing (D) has recourse to contingency funds maintained by it in the forms of Security Deposit and contributions made to the Clearing Fund.

Security Deposit

Each clearing participant must maintain a Security Deposit of RM1 million lodged with Bursa Clearing (D) in the form of cash or Letters of Credit. The Security Deposit lodged by a clearing participant will be used by Bursa Clearing (D) in the event of default to cover any amount owing by that clearing participant to Bursa Clearing (D).

Clearing Fund

Bursa Clearing (D) maintains a Clearing Fund for the purpose of making good any loss suffered by it as a result of the failure or omission by any clearing participant to perform any of its obligations under the Bursa Clearing (D) Rules or if any financial institution or clearing house organisation fails to perform any obligation to Bursa Clearing (D) when due because of insolvency, indefinite suspension of operation or suspension of payments or any similar event.

A clearing participant’s contribution to the Clearing Fund must be in the form of cash consisting of a fixed contribution of RM1 million and a variable contribution .

In the absence of default by a clearing participant, the Clearing Fund may be availed of by Bursa Clearing (D) to cover any losses suffered by it due to the default of a financial institution or another clearing house. This is to ensure that systemic stability is not threatened by reason of any situation affecting Bursa Clearing (D) which is outside of its control. If the losses suffered by Bursa Clearing (D) results from a default of a clearing participant, that clearing participant’s margins, excess cash and collateral, Security Deposit and Clearing Fund contribution will be claimed upon first. In the unlikely event that this is insufficient to cover the loss, Bursa Clearing (D) can resort to the Clearing Fund contributions of other clearing participants on a proportionate basis. Clearing participants are liable to pay Bursa Clearing (D) an additional 100% of their existing contributions in the Clearing Fund if Bursa Clearing (D) suffers losses exceeding the amount available in the Clearing Fund.

Risk management policies adopted by Bursa Clearing (D) are designed to minimise the likelihood of a default by a clearing participant. However, in the event of disciplinary and default situations, Bursa Clearing (D) is authorised to take actions pursuant to Chapter 9 and 10 of the Bursa Clearing (D) Rules.