All transactions are cleared and settled through the electronic clearing and settlement system of Thailand Clearing House (TCH), a SET subsidiary. TCH’s key role is to guarantee the performance of all contracts entered into the system by its members. TCH’s clearing platform supports all TFEX-traded derivatives products.
Right after a trading transaction is matched and those exchanges have confirmed the matching transactions with their members, TCH as the direct central counterparty (CCP), will become a buyer to every selling member and a seller to every buying member. Therefore, a member who has bought or sold the securities has an obligation not to the party on the other side of the transaction, but to the clearinghouse, just as the clearinghouse has an obligation to the member. This is called a “Novation” process.
As a CCP, TCH guarantees the performance of payment and securities delivery of any trading transaction on TFEX. This reduces the risks stemming from clearing members who fail to meet their contractual obligations or ‘credit risks’, thereby strengthening the confidence in and by the involved parties, as well as preserving the financial integrity of the clearinghouse and the market as a whole.
All traded contracts on TFEX must be settled and cleared on the business day following the trading day (T+1). Each open position is mark-to-market at the end of the trading day based on the declared settlement price. Should there be a margin shortfall, additional margin is called to maintain minimum margin requirements.
The clearing house’s margin is calculated based on portfolio margining concept, employing SPAN which is a portfolio risk-based margining system. The margin requirement set forth by the clearing house is the minimum requirement level that futures brokers must pledge to the clearing house for every open position. Brokers, in turn, must collect margin from clients at the initial margin requirement rates. Currently, several currencies are accepted for initial margin such as cash in THB, USD, EUR and JPY.
The maintenance margin is used to cover potential losses that may incur within a certain period, while the variation margin has been collected to cover losses based on daily mark-to-market outstanding positions at the end of the day. Furthermore, in a very volatile market, an intra-day margin has been planned to further protect the system. An additional margin has also been established to cover any other potential losses that may affect the TCH’s financial integrity.
According to the Securities and Exchange Commission Thailand (SEC), institutional clients and market makers shall deposit initial margin before the closing time of the next trading day (T+1), while other clients shall deposit initial margin before making derivatives orders.
As a mutual agreement between brokers and the Futures Industry Club (FI Club), the margin for institutional investors and individual investors are as follows:
Multiplier of TCH’s maintenance margin as agreed by FI Club (as of Feb 13, 2014)
|Initial Margin||Maintenance Margin||Force Close Margin|
TCH facilitates non-residents investing in TFEX products by accepting USD, EUR and JPY deposits as initial margin, thus reducing their exchange rate risk, lowering investment cost, and shortening the process of collateral placement.
In principle, investors could pledge foreign currency as collateral for initial margin as well as maintenance margin with their brokers. The foreign currency pledged will not be converted but will be evaluated for value of collateral that the investors pledged in terms of THB. In evaluation of collateral value, clearing house will apply some haircut and calculate value in THB using the Bank of Thailand’s announced exchange rate.
Foreign Currency collateral will be deposited in foreign currency deposit account at the clearing house and earns interest. The net interest after applicable tax will be credited to foreign currency deposit account.
The daily mark-to-market of futures position, however, will be settled in THB. Specifically, as daily gain and loss will be received and paid in THB, investors need to prepare a portion of money in THB for daily mark-to-market gain/loss. When investors close futures position, clearing house will return the foreign currency collateral back to brokers who will then repay investors.
As a central counterparty (CCP), TCH has strengthened its financial resources which, apart from the contributions from its members, are strongly supported and backed up by its parent group (the SET group). Through the contributions of the security deposits and the clearing fund, TCH applies a combination of defaulter pay and loss-sharing procedures to guard against defaults of its members.
To assist TCH in closely monitoring its members’ finances, TCH requires that its members regularly submit their financial statements to TCH. Furthermore, to assure the integrity of the system, TCH assesses and monitors the adequacy of its own financial resources on a daily basis. In case TCH is potentially at risk or discovers any shortage, it has the right to call for, at any time, an additional margin from its clearing members.
Thailand Clearing House (TCH)
Qualified Central Counterparty (QCCP)
TCH has its operation in line with international standard. In July 2016, TCH submitted the application to European Securities and Markets Authority (ESMA) to certify that TCH has sound risk management and safe operation. As a result, TCH has a qualified central counterparty (QCCP) status by ESMA. This means that European TCH participants have been able to utilize TCH’s clearing services by using significant lower capital requirements compared to prior receiving non-QCCP status.
In addition, TCH has disclosed the self assessment that conforms to the Principle for Financial Market Infrastructure (PFMI) standard on TCH website. For more information, please visit PFMI Disclosure