SGX RegCo proposes amendments to CDP margining and clearing fund rules

Russell Marino Soh
Published Thu, Nov 3, 2022 · 05:16 PM

SINGAPORE Exchange Regulation (SGX RegCo) is consulting the market on proposed changes to the Central Depository’s (CDP) margining framework and the CDP clearing fund.

CDP provides clearing services – assuming the role of seller to buyers, and buyer to sellers.

When a clearing member defaults on its obligations to CDP, any loss incurred by CDP as a result will first be met with margins collected from the defaulter. If the loss exceeds the defaulter’s margins, the clearing fund will be used to mutualise the residual loss. These measures help to mitigate the impact that a default could have on the rest of the financial system.

Three changes have been proposed to the margining framework, with the aim of making the margin required of each clearing member more closely commensurate with the level of risk that it brings to the system. This would reduce the likelihood of using the clearing fund in the event of a default.

The first proposed change is to offer differentiated margin rates for groups of securities with different risk profiles.

CDP currently charges all securities based on a single margin rate, which is based on the weighted volatility of the FTSE Straits Times Index (STI), FTSE Straits Times (ST) Mid-Cap Index, and the FTSE ST Small-Cap Index.

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Under the proposed change, securities would be categorised into three groups with differentiated margin rates. Group One comprises the constituents of the STI, and highly liquid blue-chip counters, while Group Three comprises all structured products, such as daily leverage certificates and structured warrants; all remaining securities fall into Group Two.

The second proposed change is to introduce margin offsets for greater efficiency. These would be offered only to Group One securities, to take into account the diversification effects of a portfolio containing both buys and sells. Margin offsets would be “calibrated conservatively so that margins remain sufficient to a high degree of confidence”, said SGX RegCo.

The third proposed change to the margining framework is to enhance anti-procyclicality (APC) measures to better temper sudden margin increases.

Currently, CDP uses a margin floor as an APC measure, to maintain a minimum level of margin resources, and reduce the extent and speed that margin requirements could increase during volatile periods.

CDP has proposed, in lieu of this, a dynamic margin buffer, which would be imposed when prevailing volatility is lower than long-term volatility. The size of the buffer will be based on the difference between the two, subject to a minimum of 25 per cent.

In proposing a dynamic margin buffer over other APC measures, SGX RegCo said that a margin buffer “appropriately balances competing concerns for stable margins, coverage of risk and cost to the membership”.

Meanwhile, four other changes have been proposed to the clearing fund.

The first is to refine the approach for determining the size of the clearing fund, and the contributions of each clearing member.

Commenting on current contribution rates, which are based on the traded value of clearing members, SGX RegCo said that “traded value is not sufficiently risk sensitive, and may not be a good reflection of CDP’s potential losses in a default”.

To mitigate this, CDP has proposed sizing the clearing fund based on stress test losses arising from the simultaneous default of the top clearing member and its affiliates, and the two financially-weakest clearing members over the preceding 12 months. A clearing fund floor has also been proposed, to give stability to the clearing fund size.

The second proposed change is to apportion the sum of contributions among clearing members, up to a maximum of 75 per cent of the clearing fund, on a pro-rata basis, based on their stress test results. This is to allow for “a more equitable allocation of risk and clearing fund contributions among clearing members”, said SGX RegCo.

The third proposed change to the clearing fund is to de-prioritise the use of contingent contributions, which are unfunded contributions deposited by clearing members only when CDP calls for them. Under the proposed change, funded contributions from both clearing members and CDP would be utilised before unfunded contributions. Contingent contributions would also be fixed at an amount equal to each clearing member’s funded contribution.

Lastly, CDP has proposed to introduce a cap on the amount of contributions that can be used for each default by a clearing member. This cap would be based on the total of the clearing member’s funded and contingent contributions. CDP would no longer require defaulters to deposit additional contributions over and beyond the funded and contingent contributions to top-up for any contributions used. Instead, any losses remaining after the clearing fund is exhausted would be borne by CDP.

The public consultation will close on Dec 5.

As at 4.30 pm on Thursday, shares of SGX were trading lower by 0.4 per cent or S$0.03 at S$8.42.

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