SGX to expand clearing houses' management powers during defaults

It wants to auction clearing members’ positions in derivatives if they ever default.

The Singapore Exchange (SGX) is seeking public feedback on proposed amendments to the clearing rules of Singapore Exchange Derivatives Clearing Limited (SGX-DC) and the Central Depository (Pte) Limited (CDP).

SGX said in an announcement that it wants to introduce an auction protocol for liquidating a defaulted SGX-DC Clearing Member’s positions in exchange-traded derivatives contracts (ETD/OTCC Auction) and over-the-counter commodities contracts. It also seeks to create a loss distribution mechanism to address losses arising from such an auction.

It wants to allow SGX-DC to unilaterally terminate positions of non-defaulting SGX-DC Clearing Members that exactly offset those of the defaulted Clearing Member for all classes of contracts SGX-DC clears. It proposed to revise the existing loss distribution mechanism for auctions for over-the-counter financial derivatives contracts (OTCF Auction).

SGX also seeks to modify the SGX-DC Clearing Fund “waterfall” which allocates losses arising from a Clearing Member default, by incorporating “sub-waterfalls” for allocating losses arising from ETD/OTCC and OTCF Auctions.

“SGX is proposing to amend the CDP Clearing Rules to give CDP the power to write off, as a loss to CDP, a defaulted CDP Clearing Member’s unsettled buy trades if those securities are not force-sold by the seventh day after the Clearing Member is declared to be in default,” the company said.

SGX head of risk management Agnes Koh commented, “SGX’s primary remit of upholding the health and efficiency of Singapore’s financial market means we have a duty to ensure the continuity of the broader market in the event a Clearing Member defaults. We are constantly reviewing and enhancing our risk management practices.”

The public consultation is open until 16 August 2018 and SGX expects to implement the amendments in the fourth quarter of 2018, subject to regulatory approval.