SGX opens public consultation on default management process

SINGAPORE Exchange (SGX) is seeking the market's views on the process of managing outstanding securities transactions when a clearing member is in default.

The public consultation is open till Dec 21.

SGX is proposing to liquidate a member's outstanding trades in the event of said member's default.

It said that its proposal "will align the Central Depository (CDP) default management practices with global default management practices, and improve the efficiency and speed with which defaults may be resolved".

"This in turn will better protect the financial system from contagion risks due to the default of a clearing member."

Specifically, when a member defaults, the 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 reduces the number of transactions that the CDP must liquidate, thus reducing the impact on the market.

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If, after this setting-off, the defaulting member is due to deliver securities - in a "net sell" position - then 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 the 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," said the SGX in its statement.

"A swift resolution of the outstanding transactions of non-defaulting members is crucial when a clearing member defaults," said SGX chief risk officer Agnes Koh. "SGX and CDP should therefore focus on doing so to maintain confidence in the system and trust in the remaining member firms during a default crisis."