The Singapore Exchange S68 Group (SGX) has proposed a refinement of the existing cap on a clearing member’s liability to meet default losses arising from multiple events of default.
This cap is imposed on clearing members of SGX’s central counterparties (CCPs), namely the Central Depository (CDP) and Singapore Exchange Derivatives Clearing (SGX-DC).
Subject to market feedback, the proposal will limit a non-defaulting clearing member’s liability to meet multiple default losses arising within a 30-day period to three times the aggregate of its funded and unfunded clearing fund contributions, known as the prescribed contribution, as determined at the start of the 30-day period.
Under the CDP and SGX-DC clearing rules at present, a non-defaulting clearing member is obliged to meet losses arising from an event of default if it remains a clearing member of CDP and SGX-DC respectively.
In a single default event, the non-defaulting clearing member’s losses are limited to its prescribed contribution. If multiple events of default occur in quick succession, a non-defaulting clearing member may be at risk of exposure to significant default losses.
SGX says this could create an impetus for a non-defaulting member to resign in order to limit its exposure to such losses.
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The proposed cap, which is not contingent on the resignation of a clearing member, will provide clearing members with certainty on their potential exposures when multiple defaults occur, and at the same time uphold systemic stability by maintaining SGX’s CCPs’ membership in periods of extreme market stress, according to SGX.
“Our proposed rule changes are intended to align the interests of non-defaulting clearing members and the market. A limit on the default loss liability without the need for the member to resign provides greater certainty for the non-defaulting clearing members and strengthens the recovery process for our CCPs,” explains SGX chief risk officer Agnes Koh,
The public consultation is open till April 24 and can be accessed via the SGX RegCo site.
Shares in SGX closed unchanged at $9.33 on March 22.
