SGX to refine rules on default loss exposures

The proposed cap aims to provide certainty.

The Singapore Exchange (SGX Group) is proposing a refinement to the existing cap on clearing members' liability for default losses stemming from multiple default events. 

Currently, clearing members of SGX Group's central counterparties (CCPs) are subject to a cap imposed by The Central Depository Limited (CDP) and Singapore Exchange Derivatives Clearing Limited (SGX-DC). 

"Our proposed rule changes align the interests of non-defaulting clearing members and the market. Limiting default loss liability without requiring resignation offers greater certainty and strengthens CCPs' recovery processes." Agnes Koh, Chief Risk Officer at SGX Group said in a local bourse announcement.

The proposed change, pending market feedback, will restrict a non-defaulting clearing member's liability for multiple default losses occurring within a 30-day period to three times its aggregate funded and unfunded clearing fund contributions (prescribed contribution) determined at the period's onset.

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Presently, under the CDP Clearing Rules and SGX-DC Clearing Rules, non-defaulting clearing members are obligated to cover losses from a default event as long as they remain members. In a single default event, losses are capped at the member's Prescribed Contribution. 

However, with consecutive default events, non-defaulting members face substantial exposure. This may prompt members to resign to limit losses. 

The proposed cap, independent of member resignation, aims to provide certainty regarding potential exposures during multiple defaults while maintaining systemic stability by retaining CCPs' membership during extreme market stress.