On 22 March 2024, the Singapore Exchange Regulation Pte. Ltd. (“SGX RegCo“) issued a Consultation Paper on its proposals to revise existing limits on the liability of clearing members to meet default losses, particularly where losses arise from multiple events of default (“multiple defaults“). The proposed changes aim to provide certainty to clearing members on their potential exposures when multiple defaults occur, and maintain systemic stability in periods of extreme market stress. The consultation period ends 24 April 2024.
Background and Current Rules
The clearing members of the Central Depository (Pte) Limited (“CDP“) and the Singapore Exchange Derivatives Clearing Limited (“SGX-DC“) (each a “SGX CCP“) contribute to a clearing fund maintained by the SGX CCP. When losses arise from default, the clearing fund will be applied to mutualise losses among the SGX CCP and its non-defaulting members.
Currently, a non-defaulting clearing member has to meet losses arising from an event of default so long as it remains a clearing member of CDP and SGX-DC, respectively. This is provided under the CDP Clearing Rules and the SGX-DC Clearing Rules. This obligation is subject to two limits which apply in different conditions: (i) to a single event of default; and (ii) multiple defaults and is conditional upon a clearing member’s resignation. If multiple defaults happen in quick succession, a non-defaulting clearing member may be at risk of exposure to significant default losses. This may prompt the non-defaulting member to resign to limit its exposure to such losses.
Key Proposals
SGX RegCo proposed to revise the limit for a clearing member to be: (i) independent of the clearing member’s resignation; and (ii) capped, for all defaults occurring within a 30-day period, at three times the aggregate of that clearing member’s funded and unfunded clearing fund contribution amounts (Prescribed Contributions) as determined at the start of the 30-day period.
Consequential amendments to effect these changes are proposed to be made to the CDP Clearing Rules and the SGX-DC Clearing Rules.
Click on the following links for details of the proposals and changes to the Rules (available on the SGX Group website at www.sgxgroup.com):
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