Practice Note 3.9.1(3) — Pre-Execution Checks

Issue Date Cross Reference Enquiries
Added on 18 September 201218 September 2012 and amended on 15 March 201315 March 2013. Rule 3.9.1(3) Please contact Member Supervision:

Facsimile No : 6538 8273
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1. Introduction

1.1 This Practice Note explains the parameters and functions which pre-execution checks may contain as contemplated in Rule 3.9.1(3).

2. Pre-Execution Checks

2.1 Rule 3.9.1(3) requires a Clearing Member, in order to clear the trades of a Trading Member, to satisfy CDP that it has in place automated pre-execution risk management control checks to monitor the Trading Member's Exchange Trades and manage its risk exposure to such Exchange Trades. The purpose of this is to prevent overtrading and for credit risk management purposes. The parameters of such pre-execution checks and filters may include but are not limited to:—
(a) dollar limit to control the gross buy and sell value and/or net buy/sell value;
(b) security limit to control the dollar/quantity exposure to each security;
(c) dollar/quantity limit and price limit for each order. This allows for the detection of errors in inputting orders; and
(d) controls to restrict Trading Members to selected markets, order types and securities.
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 suspend the Trading Member during the trading session on a real time basis; and
(c) the ability to intercept orders that exceed credit limits and trigger error-prevention alerts on a real time basis.
2.3 Clearing Members will be able to meet the requirement in Rule 3.9.1(3) by being able to directly set and control pre-determined automated limits in the Trading Member's system, having automated alerts whenever such limits are altered, and by conducting regular post-execution reviews of trades. Clearing Members should assess and continue to ensure that the pre-execution risk management control checks are robust on an ongoing basis.

Added on 18 September 201218 September 2012 and amended on 15 March 201315 March 2013.