Singapore Exchange Strengthens Clearinghouse Margin Requirements
The Singapore Exchange (SGX) says it will require traders to put up collateral at its clearing house to reflect the daily risks of share trading and minimize the fallout from a catastrophic default scenario.
As of January, the exchange wants members to post maintenance collateral to reflect "potential future exposure" and variation margin to cover mark-to-market losses. Currently brokers trading on SGX make regular contributions to a default fund which is reviewed monthly. The contribution is calculated based on the total value of trades in the past twelve months.
Here is how SGX explains its new requirement for which it is seeking comments by August 21. "At present, the CDP [Singapore's clearinghouse] maintains a clearing fund comprising contributions from CDP and its members that covers losses that may arise from the liquidation of a defaulting member's positions. With the proposed margin framework, CDP will hold additional financial resources from individual members which are available to meet their obligations in the event of their own default."
A clearinghouse stands between two parties to a trade guaranteeing that the deal is completed if either party defaults. It typically first relies on margin posted by each member and if that is not sufficient may decide to draw on a common default fund to which all its members contribute. The new requirement, says the exchange, reflects a "real time" view of collateral requirements and an extra collateral cushion to reduce counterparty risk for both members and the clearinghouse itself.
Regulators have been advocating that, as systemically important organizations, clearinghouses improve their risk management to avoid the potential for taking on excessive risk. The SGX's proposed margin requirements follow new international standards established by the Committee of Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). In April, the umbrella organization for the world's securities watchdogs, said clearinghouses were required to ensure their infrastructure is "robust" and "well-placed to withstand financial shocks."
In March, Singapore rival Hong Kong Exchanges & Clearing admitted that its risk management practices were not up to snuff and said it will introduce volatility-based margining by the end of the year. It will also introduce a default find as a second line of defense against excessive losses in "extreme but plausible situations."
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com).