The authors begin by explaining how HKFE futures margins are set. As part of their explanation, they look at the role of an exponentially-weighted moving average (EWMA), volatility-based margin model in setting HKFE futures margins.
The model sets the margin level high enough to cover the HKCC against the daily price movements of a futures contract with a confidence level of over 99.74%, which is 1-5% higher than that of other major international exchanges and clearing houses.
The authors then compare the EWMA approach with the simple moving average (SMA) approach the Exchange used to use and highlight the reasons why the EWMA is a better approach.
They also outline other factors the HKCC considers when setting HKFE margins. These include: (1) historical and implied volatility divergence; (2) net open interest level; (3) the ratio of open interest value to underlying market value; (4) the ratio of futures turnover value to underlying market turnover value; (5) the ratio of open interest to turnover; and (6) volatility-on-volatility.
In addition, the article includes sections on the HKCC's daily mark-to-market mechanism and intra-day margin calls.
In their conclusion, the authors note the prudent risk management system used by the HKFE and the HKCC "provides the highest protection to HKCC Participants."
A copy of today's article can be found on the Exchange's website - www.hkfe.com - under the News Centre's Special Reports section. Past education articles are also available on the website.
