SINGAPORE Exchange (SGX) is seeking market feedback on proposed changes to refine the cap on a clearing member’s liability to meet default losses arising from multiple events of default.
The cap is imposed on clearing members of SGX’s central counterparties – the Central Depository (CDP) and Singapore Exchange Derivatives Clearing Limited (SGX-DC).
The proposed change seeks to 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, as determined at the start of said period.
Under CDP and SGX-DC clearing rules, a non-defaulting clearing member is obliged to meet losses arising from an event of default, so long 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. But in the case of multiple defaults which take place in quick succession, a non-defaulting clearing member may be at risk of exposure to significant default losses, said SGX. This may create an impetus for a non-defaulting member to resign in order to limit its exposure to such losses.
The proposed cap refinement will thus provide clearing members with certainty on their potential exposure when multiple defaults occur, while upholding systemic stability by maintaining the central counterparties’ membership in periods of extreme market stress, said SGX.
“Our proposed rule changes are intended to align the interests of non-defaulting clearing members and the market,” said SGX chief risk officer Agnes Koh.
“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 central counterparties.”
The public consultation will be open until Apr 24.
Shares of SGX closed flat at S$9.33 on Friday, before the announcement.
