Practice Note 2.6.3(1)(c) — Pre-Execution Checks
|Issue Date||Cross Reference||Enquiries|
22 September 2006 and amended on 15 March 201315 March 2013
Please contact Member Supervision:
Facsimile No : 6538 8273
E-Mail Address: email@example.com
1.1 This Practice Note explains the parameters and functions which pre-execution checks may contain as contemplated in Rule 2.6.3(1)(c).
2. Pre-Execution Checks
2.1 Rule 2.6.3(1)(c) requires Members to ensure that automated pre-execution risk management control checks are conducted on all orders, including credit control checks on all orders. The purpose of this is to prevent overtrading. The parameters of such pre-execution checks and filters may include but are not limited to:
(a) total quantity limit (taking into account the total long and short positions, including all resting orders and executed orders);
(b) maximum long per contract (taking into account the total long positions, including resting long orders and net executed orders);
(c) maximum short per contract (taking into account the total short positions, including resting short orders and net executed orders);
(d) total maintenance margin requirements for the absolute worst positions (i.e. the higher of absolute maximum long and absolute maximum short), computed by using the margin rate prescribed by the Exchange; and
(e) net exposure limit (taking into account net long and short positions).
2.2 By way of illustration, pre-execution risk management control functions may include the following:
(a) the ability to adjust credit or quantity limits in real time during a trading session;
(b) the ability to set permission levels (e.g. access to selected products/ instruments) and revoke the access of an Approved Trader or customer on a real-time basis; and
(c) the ability to intercept orders that exceed credit or trading limits on a real-time basis and trigger error-prevention alerts.
2.3 Members who authorise Sponsored Access will be able to meet the requirement in Rule 2.6.3(1)(c) by being able to directly set and control pre-determined automated limits in the Sponsored Access customer's system, having automated alerts whenever such limits are altered, and by conducting regular post-execution reviews of trades. Members should assess and continue to ensure that the pre-execution risk management control checks are robust on an ongoing basis.
2.4 Where a Trading Member has allowed its Clearing Member to directly set and control pre-determined automated limits in the Trading Member's system, the Trading Member should have the appropriate internal controls to prevent unauthorised modification of the limits set by the Clearing Member.