SGX looks to introduce large exposure collateralisaton for securities

Source: Singapore Exchange

Singapore Exchange Limited ("SGX") is proposing to revise the Central Depository Limited ("CDP") Clearing Fund structure, and introduce collateralisation of large securities settlement exposures of Clearing Members.

CDP operates the clearing system by acting as the counter-party for every trade matched on SGX's securities trading platform ("SGX-ST") or accepted for clearing by the CDP. The risk to CDP is the possible failure of a Clearing Member to meet its financial obligations (i.e a default). In the event of default, the Clearing Fund will be used to meet clearing obligations. The substantial increase in securities trading activity over recent years has made it necessary to revise the Clearing Fund structure to a scalable model. The introduction of collateralisation practice strengthens the robustness of SGX's risk management framework to weather different market conditions.

CDP Clearing Fund Structure
The proposed "Variable CDP Clearing Fund Structure" comprises the following changes:-

a. to restructure Clearing Members' contribution to the Clearing Fund based on:
i. a collateralised portion based on a percentage of the individual Clearing Member's turnover, with a minimum contribution of S$1 million and with a minimum aggregate contribution from all Clearing Members of S$40 million (from S$15 million), and
ii. a contingent (non-collateralised) portion similarly based on a percentage of the individual Clearing Member's turnover;
b. to raise the amount of CDP's contribution to the first layer of the Clearing Fund from S$25 million to S$30 million. The increased contribution by CDP decreases the probability of tapping non-defaulted Clearing Members' contributions in the event of a default;
c. to revise the forms of collateral that the CDP accepts from Clearing Members' as their contribution to the Clearing Fund;
d. to allow the CDP the flexibility to replace Insurance with the other acceptable instruments, and
e. to remove the Standby Line of Credit as part of the Clearing Fund.

Collateralisation on SGX Clearing Members with Large Settlement Exposures

SGX is proposing to require Clearing Members with large securities settlement exposure to deposit collateral that is proportionate to their level of risk, with the CDP. The new practice enhances the robustness of the clearing system by allocating responsibility to individual Clearing Members for any increased risks they bring to the clearing system.

The consultation paper and proposed CDP Clearing Rules are available on from 15 June to 13 July 2009.

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