26 November 2020
On 20 November 2020, Singapore Exchange (“SGX”) issued a consultation paper on the process of managing outstanding securities transactions should a clearing member be in default. The consultation closes on 21 December 2020.
SGX proposes that the Central Depository (“CDP”) will liquidate a member’s outstanding trades in the event of the member’s default. The proposals include:
- CDP will set off for each counter, the defaulting member’s outstanding buy and sell trades, regardless of whether the trades are due to customers or non-customers. By lowering the number of transactions that CDP must liquidate, the impact on the market is reduced.
- CDP will acquire the securities the defaulting member is due to deliver
(net sell) after setting off and close out net outstanding trades. Conversely, CDP will sell the securities the defaulting member is due to receive securities
(net buy) after setting off and close out the net outstanding trades.
- The proceeds, costs or expenses resulting from the acquisition or sale will be added to the tally of loss arising from the member’s default. Such loss will be covered by the defaulting member’s collateral. When that is insufficient, the loss will be mutualised among CDP and non-defaulting members through the clearing fund, concluding the default management process.
CDP will continue to settle the outstanding trades of non-defaulting members and their customers. SGX has reiterated its assurance to customers of a defaulting broker that their monies or assets will not, at any point, be used to meet the liabilities owed by the defaulting member to CDP.
This proposal will align the CDP default management practices with global default management practices. With improved efficiency and speed in resolving defaults, the financial system is better protected from contagion risks due to the default of a clearing member.
The following materials are available on the SGX website www.sgx.com:
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