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Practice Note 7A.01B — Illustrations of the Application of Clearing Member's Security Deposits and Further Assessment Amounts in respect of OTCF Contracts
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  Versions
(1 version)
 
Jun 30 2014 onwards

Practice Note 7A.01B — Illustrations of the Application of Clearing Member's Security Deposits and Further Assessment Amounts in respect of OTCF Contracts

Issue Date Cross Reference Enquiries

Added on 30 June 2014.

Clearing Rules 7A.01B.3.c, Rule 7A.01B.3.d and Rule 7A.01B.4.a Please contact:

Risk Management
E-Mail Address : rmd@sgx.com

1. Introduction

1.1. This Practice Note illustrates the use of Clearing Members' Security Deposits and Further Assessment Amounts for OTCF Contracts as set out in Rule 7A.01B.3.c, Rule 7A.01B.3.d and Rule 7A.01B.4.

2. Allocation of loss between Participating Clearing Members which are liable for loss remaining in an auction under Rule 7A.01B.3.c and Rule 7A.01B.3.d

2.1 When an event of default has occurred in OTCF Contracts and losses remain after the auction(s) referred to in Rule 7A.02.1.5.b, the Security Deposit and Further Assessment Amount that are apportioned to OTCF Contracts, of a Clearing Member that is active in OTCF Contracts (as described in Rule 7A.01A.2.b), will be used to meet those losses.1
2.2 Rule 7A.01B.3 sets out the order of priority in which such funds of such a Clearing Member will be used to meet the losses that remain after an auction. There are three general levels in that order of priority.
i. The first level is described in Rule 7A.01B.3.a (Security Deposits) and Rule 7A.01B.3.b (Further Assessment Amounts). All Clearing Members that are obliged to participate in the auction (i.e., Participating Clearing Members) but that did not submit a bid will fall within this first level.
ii. The second level is described in Rule 7A.01B.3.c (Security Deposits) and Rule 7A.01B.3.d (Further Assessment Amounts). All Participating Clearing Members that bid below the Reference Price2 will fall within this second level.
iii. The third level is described in Rule 7A.01B.3.e (Security Deposits) and Rule 7A.01B.3.f (Further Assessment Amounts). All Clearing Members with Security Deposits and Further Assessment Amounts which are apportioned to the auction and which are not available for use pursuant to Rule 7A.01B.3.a, b, c and d, or which have not been exhausted pursuant to Rule 7A.01B.3.c and d, will fall within this third level.
2.3 Each Clearing Member that is liable in the second level will be liable for the loss remaining on a pro-rata basis, calculated as the proportion of the product of:
i. the distance between that Clearing Member's bid price and the Reference Price; and
ii. that Clearing Member's Security Deposit/Further Assessment Amount requirement apportioned to OTCF Contracts,
relative to the aggregate of the product of i and ii for all Clearing Members that is liable in the same second level.
2.4 By way of illustration, the liability of Participating Clearing Members, A and B, for the loss remaining in an auction will be in the following proportions, assuming the following bidding behaviour:

  Distance of bid from Reference Price (A) Security Deposit/Further Assessment Amount requirement apportioned to OTCF Contacts (B) A x B Proportion
Participating Clearing Member A S$48 million S$10 million 48 x 10 = 480 480 / (480 + 240) = 2/3
Participating Clearing Member B S$12 million S$20 million 12 x 20 = 240 240 / (480 + 240) = 1/3

3. Use of unexhausted Security Deposit or Further Assessment Amount in another Auction

3.1. Rule 7A.01B.4.a states that if a Clearing Member is liable to meet losses in the same order of priority in two or more auctions held in respect of an event of default, its unexhausted funds from the first auction will be used in the corresponding source in the other auction(s), but only after the funds in that source apportioned to the other auction(s) have been exhausted.
3.2. By way of illustration, Participating Clearing Member A ("PCM A") and Participating Clearing Member B ("PCM B") are required to bid in two auctions held in respect of a default in OTCF contracts. The OTCF contribution of PCM A and PCM B that is apportioned to each auction ("auction contribution") is $3m respectively. The bidding behaviour of PCM A and PCM B and the consequent priority of usage of their auction contribution are summarised below:

  KRW NDF auction Losses after auction = $2m INR NDF auction Losses after auction = $20m
PCM A
- Bidding behaviour:
- Priority of usage of auction contribution:
Did not bid
First level
Did not bid
First level
PCM B
• Bidding behaviour:
• Priority of usage of auction contribution:
Bid below Ref. Price
Second level
Bid below Ref. Price
Second level


In such a case:

i. PCM A's KRW NDF auction contribution ($3m) will be used to fully meet all the losses in the KRW NDF auction ($2m), with $1m remaining. That $1m will be used to meet the losses in the INR NDF auction. As PCM A lies in the first level in both auctions, the $1m will be used in the INR NDF auction, like in the KRW NDF auction, at the first level. However, the $1m will be used only after the INR NDF auction contributions of all Clearing Members that fall within the first level in the INR NDF auction (which would include PCM A) have been exhausted.
ii. PCM B's KRW NDF auction contribution will not be used because PCM A's auction contributions are more than sufficient to meet the losses in that auction. PCM B's KRW NDF auction contributions ($3m) will be used to meet the losses in the INR NDF auction. As PCM B lies in the second level in both auctions, the $3m will be used in the INR NDF auction, like in the KRW NDF auction, at the second level. However, the $3m will be used only after the INR NDF auction contributions of all Clearing Members that fall within the second level in the INR NDF auction (which would include PCM B) have been exhausted.
In summary, funds will be used to meet the losses in each auction in the following descending order of priority:

  KRW NDF auction Losses after auction = $2m INR NDF auction Losses after auction = $20m
First level Part of PCM A's auction contribution ($2m)
(1) All of PCM A's auction contribution ($3m); then
(2) PCM A's unexhausted KRW NDF auction contribution ($1m)
Second level -
(1) All of PCM B's auction contribution ($3m); then
(2) PCM B's unexhausted KRW NDF auction contribution ($3m)

Added on 30 June 2014.


1 The Clearing Member's funds will be used only if losses still remaining after the defaulting Clearing Member's Clearing Fund contributions and the relevant portion of the Clearing House First Loss Contribution are used.

2 Unless otherwise notified by the Clearing House, the Reference Price will be the median bid (if there are at least 5 bids submitted by Participating Clearing Members) or the winning bid (if there are fewer than 5 bids submitted by Participating Clearing Members).