THE Singapore Exchange (SGX) S68 : S68 0% announced on Friday that it will amend its process of managing outstanding securities transactions when a clearing member is in default.

Under the new rules, when a member defaults, the Central Depository (CDP) will set off this member's outstanding buy- and sell-trades for each counter, regardless of whether the trades are due to customers or non-customers.

This will reduce the number of transactions that the CDP must liquidate, thus reducing the impact on the market.

This follows last November's public consultation on the proposed changes, which received strong market support, said SGX in a statement. It had proposed then to liquidate a member's outstanding trades in the event of that member's default.

The bourse said that the amendments - to kick in on Monday - "will align the CDP default-management practices with global default-management practices which other clearing facilities employ". The change will also make the current default-management process "more efficient and enable a speedier resolution of any default".

"This will consequently better preserve the integrity and robustness of the financial system from contagion risks should a clearing member default," said SGX.

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If, after this setting-off, the defaulting member is due to deliver securities in a "net sell" position, the CDP will acquire those securities and close out the net outstanding trades.

Conversely, if the defaulting member is in a "net buy" position and due to receive securities, the CDP will sell the securities and close out the net outstanding trades.

Proceeds, costs or expenses resulting from the above acquisition or sale will be added to the tally of loss arising from the member's default. Such loss will be covered by the defaulting member's collateral. When that is insufficient, the loss will be mutualised among the CDP and non-defaulting members through the clearing fund. That concludes the default-management process.

The CDP will continue to settle the outstanding trades of non-defaulting members and their customers. Customers of a defaulting broker can also continue to be assured that their monies or assets will not, at any point, be used to meet the liabilities owed by the defaulting member to CDP.

SGX said that under the proposed process, customers would be better protected than the defaulting member and its affiliates.

The proposed process contemplates the possibility of CDP settling house trades, but limited only to house sell trades, and only to the extent that there are securities available for delivery in the defaulting member’s house account.

That said, the sale proceeds arising from the settlement will not be paid to the defaulting member and its affiliates. Instead, CDP will keep the proceeds and use them to set-off the losses incurred by CDP in managing the defaulting member’s default. By doing so, CDP minimises the potential loss and consequential systemic risk attributable to the default, said SGX in response to feedback that the proposed process prioritises the defaulting member and its affiliates over customers.

On the preference for retail investors to be able to continue settling with CDP in the event that their brokers default, SGX said that the current process prolongs default management, which exposes the financial system to further risks such as the erosion of systemic confidence in the market and contagion to other brokers and their customers.

The new process, however, allows retail investors to re-establish their trades in the market with another broker, without having to take the step of coming forward to deliver securities or pay additional monies to CDP to settle when their broker defaults.

Meanwhile, there were also concerns that investors may be confused as to whether they will receive their purchased shares when their broker defaults. But SGX highlighted that CDP will not, in a default, settle any customer trades with the defaulting member. 

As to whether investors would be required to settle their outstanding trades with the defaulting broker, that would be an issue between the investors and the defaulting broker, governed by the terms of their relationship, said SGX.

Shares of SGX ended Friday at S$10.17, up S$0.09 or 0.9 per cent.