Shanghai Clearing House introduces Close-out Netting for Failure to Pay EoD

The coming into effect of the PRC Futures and Derivatives Law (“FDL”) in August 2022 was a significant milestone in the OTC derivatives clearing space as the FDL expressly recognises the importance of central clearing of OTC derivatives and provides important protections to participants of central clearing conducted at onshore central counterparties such as the Shanghai Clearing House (“SHCH”). 

Notwithstanding the statutory protection offered by the FDL, some clearing members (“CMs”) of SHCH and their clearing clients found that they were unable to obtain favourable regulatory capital treatment under the rules of their home jurisdiction for transactions at SHCH because the SHCH clearing rules and central clearing agreement currently only provides CMs with a right of close-out against SHCH in limited circumstances, i.e. in the event of a bankruptcy of SHCH (which is an automatic early termination event under the rules).

This is about to change with the release by SHCH of the 10th edition of its clearing guidelines, which became effective on 22 December 2023.