SGX revises limit on clearing members’ liability for multiple defaults

28 November 2024

On 31 October 2024, amendments to the CDP Clearing Rules and the SGX-DC Clearing Rules (collectively, “Rules”) to implement refinements to the cap on a clearing member’s liability to meet default losses arising from multiple events of default took effect. This cap is imposed on clearing members of Singapore Exchange’s (“SGX”) central counterparties, namely The Central Depository (Pte) Limited (CDP) and Singapore Exchange Derivatives Clearing Limited (SGX-DC).

Background

SGX published a consultation paper seeking feedback on the proposed changes on 22 March 2024. On 17 October 2024, SGX published its response to the feedback received (“Response”), stating that it had incorporated feedback in the revised Rules where appropriate.

Refinements to existing multiple default caps

Under the revised Rules, a clearing member’s liability to meet all defaults occurring within a 30-day period is capped at three times the aggregate of that clearing member’s funded and unfunded clearing fund contribution amounts (“Prescribed Contributions”) as determined at the start of the 30-day period.

In the Response, SGX said that the objective of the amendment is to provide clearing members with certainty, on any given day, of their maximum liabilities for the next 30 days. Furthermore, because the proposed methodology looks back to the Prescribed Contributions as they were 29 days prior, members are guaranteed that even if there have been subsequent increases in clearing fund requirements, the clearing member’s maximum liability will not increase. This methodology therefore gives members certainty to plan their funding requirements.

Methodology to calculate clearing fund contributions available to meet default losses under revised multiple default caps

Under the revised Rules, the amount of a non-defaulting clearing member’s funded clearing fund contributions and unfunded clearing fund contributions that is available to meet losses suffered by the clearing house arising from or in connection with that default is the lower of:

• an amount equal to three times of the clearing member’s Prescribed Contributions as at the start of the 30-day period that ends on the day of the event of default less the aggregate amount of that clearing member’s funded and unfunded clearing fund contribution amount that has already been utilised to meet losses arising from or in connection with all other preceding events of default that had occurred in that 30-day period; or
• where the clearing member’s funded clearing fund contribution was adjusted during the aforementioned 30-day period, an amount (“Adjusted Amount”) equal to three times of the consequently adjusted Prescribed Contributions less the aggregate amount of the clearing member’s funded and unfunded clearing fund contribution amount that has already been utilised to meet losses arising from or in connection with events of default that occurred after the day of that adjustment but before the event of default.

Where there are multiple such adjustments of a clearing member’s funded clearing fund contributions during the 30-day period, a separate Adjusted Amount shall be calculated for each adjustment and the lowest Adjusted Amount shall apply for the purposes of paragraph (ii).

Reference materials

The Response is available on the SGX website www.sgx.com.