Singapore Exchange (SGX) is seeking public comment on proposals to introduce a margin requirement for securities cleared via its central depository (CDP).
The stock exchange proposed the requirement in order to achieve greater alignment with the Principles for Financial Market Infrastructure (PFMI) developed by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) to ensure that financial market infrastructures are robust and better placed to withstand financial shocks. The Monetary Authority of Singapore is adopting these standards for financial market infrastructures in Singapore.
In this regard it is introducing a margin framework to securities that are cleared through the CDP and amending its clearing rules and its trading rules over the next few months.
Margining is a well-established risk-management tool for a CCP to manage its credit exposures to its participants, said SGX.
In the current framework, CDP maintains a clearing fund to cover loses arising from defaulting clearing members positions. The clearing fund comprises contributions by CDP and its clearing members, CDPs contribution is available as the first layer of the clearing fund, after the defaulting clearing members contribution to the clearing fund has been used. Clearing members share in the residual losses after CDPs contributions have been used. CDP is currently sized to cover the credit exposure of its largest and two weakest clearing members. Resources available to CDP are supplemented by the large exposure collateral, which CDP requires from a clearing member when its exposure exceeds its normal clearing activities. The large exposure collateral better protects the clearing system against the default of individual clearing members with particularly large risks.
In the proposed new framework, securities cleared through CDP will be subject to a margin requirement, which SGX says provides for more direct attribution to risk clearing members, whose margin payments will vary directly with the risk that their portfolio of trades bring to the clearing system
Margins will be collected at the clearing member level and CDP will not require clearing members to collect margin from their customers.
In proposing the margin framework for securities, CDP has reviewed the practices of peer clearing houses, actively engaged market participants through forums and dialogues in the past months, and conducted rigorous back-testing
CDP intends to require each clearing member to deposit margin with CDP that commensurate with the level of risk contributed by its portfolio of outstanding securities transactions.
Margins will be required to meet current and potential future exposure arising from the liquidation of a defaulting clearing members positions. CDP proposes to impose margins on a clearing members portfolio of outstanding securities trades, which are transacted for the account of the clearing member, as well as its customers (clearing member total margin requirement). Securities transactions for which a selling member has failed to deliver on settlement day are considered outstanding positions and will be included in the margin calculation.
A clearing members total margin requirement for securities must be met by its own funds. CDP will not require margins to be collected from customers by clearing members for securities transactions. If a clearing member elects to collects margin from its customers for securities transactions, such margin cannot be used to meet the clearing member margin requirement with CDP.
A clearing members total margin requirement is the sum of two components: maintenance margin, which covers potential future exposure, is based on an expected 1-day market movement in the prices of the securities; and variation margin, which covers mark-to-market losses, that is, the reduction (or increase) in the prices of the securities from the prices at which the securities were purchased (or sold).
Margin framework for extended settlement contracts will remain unchanged. Currently, CDP imposes margin on customers in respect of extended settlement contracts. There will be no change to the requirements for customers dealing in extended settlement contracts.
The proposed margin framework and consequential amendments to the CDP clearing rules and the SGX-ST Trading Rules are intended to be implemented in the fourth quarter of 2012, subject to the approval of MAS.
As part the amendments to the rules, a trading member can impose margin requirements, hair-cut rates, payment periods for customers to deposit collateral, valuations of positions and collateral, and making calls for additional margins, as they see fit. If a trading member is unable to contact a customer to call for margins, a written notice sent to the customer at the most recent address furnished by the customer to the trading member shall be deemed sufficient; and where a customer fails to meet such margin that the trading member may call from the customer, the trading member may take actions as it deems appropriate, without giving notice to the customer, to reduce its exposures to the customer. Such actions may include liquidating all or such part of the customer’s collateral deposited with the trading member, or taking action to offset all or such part of the customer’s positions. SGX-ST may also order such trading member to immediately to take such action to offset all or such part of the positions of the customer to rectify the deficiency.
For futures contracts, a net loss increases the variation margins and required margins amount, and a net profit decreases the variation margins and required margins amount. In calculating the mark-to-market losses or gains, a trading member must use the valuation price as determined by SGX-ST.
The public consultation on the proposed rules is open for comments from today until Aug. 21 2012.
(JDC)