Derivatives clearing, exchange-trading and collateral in China

Types of transaction

What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?

All listed equity options must be centrally cleared. There are currently no requirements for OTC equity derivatives transactions to be centrally cleared.

What categories of equity derivatives must be exchange-traded and what rules govern trading?

Listed equity options must be traded on an options exchange. There are currently no requirements for OTC equity derivatives transactions to be exchange-traded.

Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.

In the case of listed equity options, the CSDC will collect collateral from its clearing member (typically the broker) while the broker will collect collateral from the relevant investor. If the clearing member is not the same entity as the broker, the clearing member will also collect collateral from the broker. Options buyers generally do not post margin, but they are required to pay a premium. The level of collateral collected by the clearing member to the broker and by the broker to the investor shall be no lower than the level of collateral collected by the CSDC from the clearing member. There are two types of required margins: initial margin and variation margin. Eligible collateral can either be cash or securities recognised jointly by the SSE and CSDC.

In the case of stock loans and margin loans, the dealers are required to collect collateral from their clients. The value of the collateral posted by a client to the relevant dealer is required by the exchange rules to be no lower than 50 per cent of the total value of the subject shares. Eligible collateral can either be cash or securities recognised by the SSE.

Presently, onshore OTC equity options, swaps and forwards referencing China-listed shares are not centrally cleared. Parties to uncleared OTC equity derivatives typically document their collateral arrangements using a bilateral agreement. If the relevant transaction is a cross-border or offshore transaction documented under the ISDA Master Agreement, the parties are likely to use the Credit Support Annex (CSA), published by ISDA, that supplements the ISDA Master Agreement, to document their collateral arrangement. As there are no equivalents to the CSA under the Financial Derivatives Master Agreement, bespoke security interest arrangements are likely to be used for onshore OTC equity options, swaps and forwards.

Must counterparties exchange collateral for some categories of equity derivatives transactions?

In the case of stock loans and margin loans, as it is the dealers who are providing financing to their clients, only the clients are required to post collateral to the dealers.

In the case of listed equity options, options buyers generally do not post collateral, but they are required to pay a premium. Option writers are required to post collateral in accordance with the rules of the SSE and the CSDC as described in question 24.

There are currently no requirements for uncleared OTC equity derivatives transactions to be subject to an exchange of collateral.