Clearing
Clearing is an essential process in financial markets, ensuring the security of transactions from execution to settlement. It involves managing positions, calculating obligations, and ensuring there is sufficient cash or financial instruments to cover potential risks.
The Role of the Clearing House
ACCH, Asia Commodity Clearing House, is a fully owned subsidiary of ACM and the designated clearinghouse for our markets. ACCH plays the crucial role of ensuring that market participants possess adequate funds in their accounts to initiate trades as well as maintain their positions. When a market participant sells a commodity in a physical transaction such as a commodity repo, the seller needs to have the assurance that the corresponding funds will be paid to the bank account. Conversely, the buyer will need to have the assurance that the underlying commodity will be received when funds are paid. Bilateral trades between buyer and seller will need both parties to trust each other and take on each other’s counterparty risk before a trade can be completed.
In a cleared commodity physical trade, the clearing house acts as the counterparty to both seller and buyer, thus mitigating the counterparty risk. As both seller and buyer trust the integrity of the clearing house, they can transact in confidence with the clearing house ensuring that the seller will get the funds and that the buyer will get the underlying commodity in the physical transaction.
In a derivative trade, the clearing house continues to act as the buyer and seller in every transaction after the trade is cleared. The clearing house, through its clearing members, will ensure that market participants place adequate margin with the clearing members and subsequently the clearing house to initiate and maintain their long or short positions. ACCH's margin model will cover almost all anticipated price changes for the products over a given liquidation period. ACCH determines prudent and appropriate margin rates using a combination of quantitative and qualitative metrics.
The Importance of ACCH in Commodities Markets
Counterparty Risk Mitigation
Counterparty Risk Management is one of the primary functions of clearing houses. ACCH acts as the central counterparty to every buyer and seller. By becoming the counterparty to every trade, ACCH effectively mitigates counterparty risk. This reduces the likelihood of default, ensuring that both parties fulfill their contractual obligations.
Margining Services and Market Risk Management
Clearing houses implement stringent margining requirements, requiring participants to deposit collateral to cover market movements.
ACCH sets the standard for commodity trading trends, implementing risk-based margining, enhancing liquidity, and ensuring smooth physical commodity settlements. Through continuous mark-to-market valuation, clearing houses ensure that the current market value of positions is reflected in real-time. This transparency helps market participants to make informed decisions based on the most up-to-date information, enhancing overall market stability and preventing amplification of market and systemic risks.
In repos, the value of underlying collateral surpassing the agreed-upon repo value is a notable risk mitigation factor. This situation not only enhances the safety of our lending position but also provides a favourable risk-reward profile for our clients. Our focus on collateralized transactions ensures a prudent approach to short-term financing, safeguarding against potential market fluctuations and borrower defaults
Collateral Management for Trading of Physical Commodities
In the trading of physical commodities, ACCH also acts as the collateral manager, working with warehouse operators and testing agencies. ACCH’s collateral management services covers the following areas.
Collateral Assessment
The initial phase of commodity inventory financing involves evaluating the value and quality of the commodities. This assessment plays a pivotal role in determining the financing capacity.
Inventory Monitoring
Throughout the financing period, ACM diligently monitors the inventory to ensure the consistent quantity and quality of the commodities and ensures the integrity of warehouse operations This proactive approach minimizes risks for both parties involved in the agreement.
Warehouse Receipts Management
ACCH holds all warehouse receipts related to commodity repos traded on ACM as irrefutable proof of the commodities' presence and status within the storage facilities. ACM has strict protocols and requirements for our warehouse operators.
Physical Delivery and Settlement
ACCH streamlines the process of physical delivery by coordinating logistics and ensuring that commodities are delivered to the market participants in a timely manner. This facilitates a smooth transition from the trading of commodity repos or derivatives to the actual transfer of physical commodities.
Capital and Operational Efficiency
ACCH enables the netting of positions across physical and derivative markets, allowing market participants to consolidate their physical and derivative positions in a single venue. This netting process reduces the number of transactions that need to be settled as well as increase capital efficiency, streamlining the operational workflow and minimizing the associated administrative burdens.
From risk mitigation to transparency and liquidity enhancement, ACCH can play a vital role in your physical and derivative trading. ACCH, with its risk-based margining and ability to consolidate physical and derivative positions, can contributes significantly to the sector's operational and capital efficiency.
