SGX proposes changes to derivatives clearing fund and OTC financials default management
Singapore Exchange Derivatives Clearing is proposing refinements to its Clearing Fund structure, and improvements in the auction process for managing a default of a Member that clears OTCF contracts derivatives.
The proposed rule amendments specify the apportionment and sequence of use of resources in the event of single and multiple defaults. There is no change to the amount of Clearing Fund resources but the refinements to the Clearing Fund structure give clarity to the market and make the clearing system more robust.
SGX Derivatives Clearing will continue to contribute at least 25 per cent of the Clearing Fund at all times. SGX is proposing to apportion this contribution to two substantive layers to cater for the possibility of multiple defaults of members in different contract classes. The first layer will be retained at a sizable 15 per cent and will continue to be used before members’ contributions. In the event of a subsequent member default in a different contract class, SGX’s intermediate layer, which is proposed to be 10 per cent, will be used before members’ contributions.
With these refinements, members can be assured that SGX’s clearing contribution will be available fairly to all derivatives businesses in the event of multiple defaults. They also make more certain the continuity of SGX’s clearing services in such an event.
The rules also cater for the remote possibility of an unsuccessful auction of a defaulted member’s OTCF portfolio. SGX Derivatives Clearing is proposing that instead of compulsory assignment of the defaulted portfolio to bidders, each member’s Clearing Fund contribution will be used to offset losses according to the distance of the member’s bid from the successful bid. Not only do the changes allow for more fairness in the default management process, members are also able to quantify better their potential liabilities from participation in clearing OTCF derivatives.