The Singapore Exchange (SGX) wants to deepen the pockets of the Central Depository (CDP) to ensure that there are more funds available to cover potential losses in the event that one or more of its securities member firms collapse.
The SGX has proposed revising the CDP Clearing Fund structure and introducing collateralisation of large securities settlement exposures of clearing members. The depository operates the clearing system by acting as the counterparty for every trade matched on SGX's securities trading platform or accepted for clearing by the CDP. In the event of the failure of a member firm to meet its financial obligations, the Clearing Fund is used to meet clearing obligations.
The SGX believes the contributions to the Clearing Fund should be increased to reflect the significant increase in trading activity over recent years. It also wants to introduce the collateralisation of member firms' contributions to strengthen the robustness of SGX's risk management framework to weather different market conditions.
There are three key changes under the SGX's proposal.
First, the total contribution of all member firms should be raised to S$40 million from the current S$15 million. The individual contribution will be based on a percentage of turnover, with a minimum contribution of S$1 million.
Second, the CDP's contribution should be raised to S$30 million from S$25 million.
Third, the forms of collateral that the CDP accepts from member firms as their contribution to the Clearing Fund should be revised.
Fourth, the CDP should be given the flexibility to replace insurance with the other acceptable instruments.
Fifth, the Standby Line of Credit should be removed as part of the Clearing Fund.
The SGX believes implementing this new practice will enhance the robustness of the clearing system by allocating responsibility to individual clearing members for any increased risks they bring to the clearing system.
The SGX has set a consultation period for the proposed changes, which ends on July 13.