30 August 2018
On 19 July 2018, Singapore Exchange Limited (“SGX”) issued a consultation paper on “Proposed Enhancements to Default Management Capabilities of SGX-DC and CDP”, seeking feedback on proposed amendments to the clearing rules of Singapore Exchange Derivatives Clearing Limited (“SGX-DC”) and the Central Depository (Pte) Limited (“CDP”) (respectively, “SGX-DC Clearing Rules” and “CDP Clearing Rules”) to enhance both clearing houses’ default management capabilities. The consultation closed on 16 August 2018.
New default management tools for SGX-DC
SGX believes that SGX-DC should close out its unmatched positions to return to a matched book as soon as practicable. Where a defaulted Clearing Member’s open positions have non-linear risks, or enjoy cross-product margin offsets and strong portfolio effect, these positions may be more expeditiously disposed of as a portfolio via an auction (“Auction Portfolio”), rather than be liquidated on an individual contract basis.
With the merger of the contract classes of ETD contracts and OTCC contracts into a single contract class, SGX-DC proposes to implement an ETD/OTCC Auction protocol to allow for more efficient management of fungible ETD contracts and their OTCC equivalents as a portfolio in a Clearing Member default. Participation in an ETD/OTCC Auction will be limited to, and mandatory for, non-defaulting Clearing Members who have open cleared positions in the contracts that constitute the Auction Portfolio at the time of the relevant event of default.
SGX-DC also proposes to employ partial tear-up as a last resort in the event that voluntary market-based default management tools fail to restore a matched book. This tool will be triggered in very limited circumstances, when:
- SGX-DC has been unsuccessful in its attempts to auction or liquidate such positions; or
- SGX-DC reasonably believes that it is impossible or impracticable to close out the remaining positions of the defaulted Clearing Member via an auction or open market liquidation.
Revised SGX-DC clearing fund loss allocation mechanism
New default loss allocation following an ETD/OTCC Auction
The outcome of an ETD/OTCC Auction determines the extent of loss incurred and this in turn determines the amount to be drawn from the SGX-DC Clearing Fund after the defaulted Clearing Member’s collateral has been applied. If the defaulted Clearing Member’s collateral is insufficient to cover the losses, the SGX-DC Clearing Fund will be drawn down in tranches. Details of the proposed sequence of the source of funds to be applied are set out in the consultation paper.
Revised default loss allocation following an OTCF auction
SGX also proposes to revise the loss allocation mechanism for the OTCF contract class arising from a default.
New default management tool for CDP
SGX also proposes to introduce 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.
Expected implementation date
Subject to regulatory approval, SGX expects to implement the proposed amendments in the fourth quarter of 2018.
The following materials are available on the SGX website www.sgx.com:
- Media release
- Consultation Paper on Proposed Enhancements to Default Management Capabilities of SGX-DC and CDP
- Appendix A - Proposed amendments to the SGX-DC Clearing Rules
- Appendix B - Proposed amendments to the CDP Clearing Rules