Practice Note 6.6A.1 Large Exposure Collateralisation for Clearing Members

Past version: Effective from 03 May 2011 to 20 Jan 2013

Issue Date Cross Reference Enquiries
3 May 20113 May 2011 Rule 6.6A.1 Please contact Risk Management:

Facsimile No : 6532 0297
E-Mail Address: rm-securities@sgx.com

1 Introduction

1.1 Rule 6.6A.1 requires Clearing Members to deposit collateral with CDP if CDP determines the Clearing Member's exposure to be large.
1.2 The objective of Large Exposure Collateralisation is to further enhance the robustness of the clearing system and allow Clearing Members to take greater responsibility for the risk they bring to the system.
1.3 Clearing Members may be required to deposit collateral with CDP under the following circumstances:
(a) where the outstanding traded values for a Clearing Member deviates significantly above its usual level; or
(b) when a Clearing Member's exposure, as measured by CDP, exceeds the Clearing Fund.
1.4 Both situations bring additional risk and are therefore addressed as part of prudent risk management by SGX. The Large Exposure Collateralisation requirement places the responsibility on the individual Clearing Member and avoids the need for an unnecessarily large Clearing Fund.
1.5 This Practice Note sets out the methodology used by CDP to compute the Large Exposure Collateralisation set out in the above Rule.

2 Methodology for Computation of Large Exposure Collateral

2.1 Scenario 1
2.1.1 A Clearing Member may be required to deposit collaterals with CDP if its 3-day gross buy outstanding traded value or gross sell outstanding traded value exceeds its individual threshold ("the Threshold"). The Threshold is a multiple ("the Multiple") of the Clearing Member's usual level of traded value. Clearing Members will be informed of the Multiple by way of a circular.
2.1.2 A Clearing Member's usual level of traded value is calculated from its preceding 12- month average (one-sided) traded value. If a Clearing Member has traded for less than 12 months, its traded value will be adjusted to a 12-month period.
2.1.3 In the case of a Clearing Member who is required to contribute at the minimum Collateralised Contribution set out in Rule 7.2.3, the Threshold will be adjusted upwards. This adjustment takes into account that the Clearing Member's Collateralised Contribution is in excess of the amount determined by multiplying the Clearing Member's Turnover and the Collateralised Contribution rate set out in CDP Clearing Rule 7.2.1A. This avoids unduly penalising Clearing Members who have low exposure.
2.1.4 The collateral requirement is a percentage ("Margin Rate") of the difference between:
(a) the Clearing Member's netted positions (based on, inter alia, account, counter and settlement date); and
(b) its Threshold.
In addition, the CDP may take into consideration the following factors in determining the final amount:
(a) Mark-to-market gains or losses;
(b) Diversification benefits; and
(c) Qualitative risk factors, such as market conditions and Clearing Members' credit standing.
2.1.5 Extended Settlement Contracts are excluded from this requirement.
2.1.6 Two examples of the calculation of the collateral requirement in Scenario 1 are set out in Appendix A of this Practice Note.
2.2 Scenario 2
2.2.1 CDP may require a Clearing Member to put up collateral if its risk exposure, as measured by CDP, exceeds the Clearing Fund.
2.2.2 Clearing Member's risk exposure is determined by applying various stress scenarios to Clearing Members' outstanding positions. These include historical price movements over the last 20 years.1
2.2.3 Collateral may be required for the excess of the outstanding risk exposure above the Clearing Fund.
2.2.4 When determining the amount of collateral, CDP may take into consideration qualitative risk factors, such as market conditions and Clearing Members' credit standing.
2.3 Clearing Members should engage the CDP, as early as practicable, if they are aware of any potential large transactions that may lead to the requirement to put up collaterals. With information on the transaction, CDP may be able to estimate the amount of collateral that may be required.

Added on 3 May 20113 May 2011.


1 The stress scenarios are in line with CPSS-IOSCO standards for assessing adequacy of clearing funds.