Past version: Effective up to 07 Aug 2016
| Issue Date | Cross Reference | Enquiries |
| Added on 21 January 201321 January 2013. | Rule 6A.9A | Please contact Clearing Risk: Facsimile No : 6532 0297 E-Mail Address: margins@sgx.com |
4 Introduction
4.1. Rule 6A.9A.1 states that in relation to Novated Contracts, CDP may call for additional margins from one or more Clearing Members in the following situations:
(1) when, in CDP's opinion, unstable conditions exist or market conditions or price fluctuations relating to one or more securities or Futures Contracts at any time require additional margins to maintain an orderly market or to preserve financial integrity or for any other reason;
(2) when CDP believes that any Clearing Member is carrying exposure that:
(a) is larger than is justified by the financial condition of that Clearing Member; or
(b) places or may place CDP at risk;
(3) where the Clearing Member is found to have a record of frequent rule violations or inadequate or unsound management or serious operational defects which, in CDP's opinion, places or may place CDP at risk; or
(4) where market conditions or price fluctuations are such that CDP deems it necessary, to call upon the Clearing Members whom it believes are affected by such conditions or fluctuations to deposit additional funds.
4.2. The objective of additional margin requirements is to provide greater assurance that specific risks which may potentially not be captured under CDP's margin setting methodologies are appropriately accounted for and collateralised for a safer and more robust clearing system.
4.3. CDP conducts daily stress testing of Clearing Members' positions under a comprehensive range of stressed scenarios, to monitor Clearing Member's exposures and to ascertain the adequacy CDP Clearing fund. In addition, as part of its continuing risk management process, CDP monitors news and developments which may affect a Clearing Member, and conducts risk-based inspections on Clearing Member's risk and credit management practices.
4.4. In the event that any of the circumstances specified in paragraph 4.1 ("Specified Circumstances") exist, CDP may impose additional margin requirements. Such additional margin requirements will typically be one of the following:
(1) Concentration risk add-on;
(2) Specific Security add-on; or
(3) Credit Risk add-on.
4.5. This Practice Note provides guidance on the additional margin requirements set out in paragraph 4.4.
5 Concentration risk add-on
5.1. Where one of the Specified Circumstances exist, CDP may impose a concentration risk add-on if:
(a) the Clearing Member's portfolio is concentrated in a security; or
(b) the Clearing Member's outstanding trades result in large potential stress test exposures, net of its margin, under CDP's stress testing regime.
5.2. Where a Clearing Member's portfolio is concentrated in a security
5.2.1. For guidance, a Clearing Member portfolio is deemed to be concentrated in a security if its net Mark-to-Market (MTM) buy or sell value in that security is more than 10% of its Aggregate (across all securities) net MTM buy or sell value respectively.
5.2.2. The concentration margin add-on for a portfolio may range between 10% and 30% of the Clearing Member Maintenance Margin if the concentrated security is a FSSTI constituent. A higher add-on of 25% to 50% applies for all other securities. Deviations from this range may occur depending on factors such as the risk profile of the security, the concentration level of the portfolio in that security, and the side (buy or sell) that is used to compute the portfolio maintenance margin.
5.2.3. Clearing Member will be notified if concentration margin add-on is to be imposed. The concentration add-on will be effective until such time that trades are settled and CDP considers that there is no longer any undue concentration risk in the Clearing Member's portfolio. CDP may impose the add-on as early as the next clearing cycle after the Clearing Member is notified.
5.3. Where the Clearing Member's outstanding trades result in large potential stress test exposures, net of its margin, under CDP's stress testing regime
CDP conducts stress testing of Clearing Members outstanding positions in line with CPSS-IOSCO and other global best practice standards to assess Clearing Fund adequacy. CDP applies a comprehensive range of stressed scenarios and provides sufficient resources to cover the simultaneous default of the Clearing Member and its affiliated Clearing Members with the largest aggregate loss, and two other financially weaker Clearing Members. CDP also simulates its obligation to settle outstanding cash trades with the direct customers of the Clearing Member should the Clearing Member default ("re-novation"). Stress testing is performed at every end of day, as well as intraday.
CDP conducts stress testing of Clearing Members outstanding positions in line with CPSS-IOSCO and other global best practice standards to assess Clearing Fund adequacy. CDP applies a comprehensive range of stressed scenarios and provides sufficient resources to cover the simultaneous default of the Clearing Member and its affiliated Clearing Members with the largest aggregate loss, and two other financially weaker Clearing Members. CDP also simulates its obligation to settle outstanding cash trades with the direct customers of the Clearing Member should the Clearing Member default ("re-novation"). Stress testing is performed at every end of day, as well as intraday.
5.3.1. CDP may impose concentration risk add-ons on a Clearing Member if the Clearing Member's outstanding positions are so large as to undermine the adequacy of the Clearing Fund. CDP takes into consideration the size of the Clearing Member's potential stress test exposure, net of margins, relative to the Clearing Fund and the credit standing of the Clearing Member.
5.3.2. CDP may require this additional margin to be deposited with CDP on the day the trades are executed or reported to SGX-ST.
5.3.3. To provide Clearing Members with more time to prepare any necessary funding arrangements to meet the higher margin requirements, Clearing Members are encouraged to engage CDP early on potential additional margin requirements if they expect significant traded values or large direct business transactions that may result in unusually large potential stress test exposures.
5.3.4. For early engagement with CDP, Clearing Members should notify CDP when their aggregated 3-day gross buy value or gross sell value, whichever is higher, is expected to exceed S$500 mil. For specific Clearing Members, this guiding threshold may be adjusted to reflect credit standing, portfolio composition and other relevant stress testing outcomes.
5.3.5. CDP will consider whether a concentration risk add-on needs to be imposed based on the factors set out in paragraph 5.3.1.The concentration risk add-on may be sized to cover the potential stress test exposure, net of margins, that is in excess of the level deemed acceptable for maintaining Clearing Fund adequacy.
6 Specific security add-on
6.1. CDP may impose a specific security add-on if there are concerns that trading in the security may be unfair or disorderly. This includes, without limitation:
(a) where there is adverse news that may have a significant impact on its market price (e.g. irregular practices in the listed company); or
(b) where the security is declared a designated security in accordance with SGX-ST Rule 8.8.
6.2. In determining whether a specific security add-on is warranted, CDP will take into account all relevant factors, including the following:
(a) trading value of the security relative to total traded value; and
(b) observable or expected price volatility of the security.
6.3. The Margin Circular issued by CDP will indicate the list of securities that will be margined at different rates. In respect of changes arising from an ad-hoc review arising from exceptional events, CDP will give Clearing Members at least a 1-day notice period before applying the specific security margin.
7 Credit risk add-on
7.1. CDP may impose a credit risk add-on if there are concerns regarding the liquidity, solvency or credit-worthiness of a Clearing Member. Indicators of potential heightened credit risk posed by a Clearing Member includes, without limitation:
(a) downgrading of the credit rating or credit outlook of the Clearing Member or its parent/affiliates;
(b) widening credit default swaps of the Clearing Member or its parent/affiliates;
(c) adverse market sentiments/news on the Clearing Member or its parent/affiliate or where CDP believes the Clearing Member or its parent/affiliate may be adversely affected by unstable market conditions or price fluctuations which CDP deems a concern;
(d) reduction of Clearing Member's financial resources;
(e) in CDP's view, there is an increase in the Clearing Member's risk exposure, for example, increased operational risk due to unsound risk or credit practices or exceptional large non-SGX exposures, that potentially places CDP at greater risk; and
(f) other specific issues or concerns relating to the Clearing Member, which may arise from SGX's on-site inspection, the Authority's audit findings; or frequent rule violations committed by the Clearing Members
7.2. In determining the quantum of the credit add-on, CDP may consider the following:
(a) prevailing market conditions:
(b) the Clearing Member's available financial resources, including liquidity resources; and
(c) the size of Clearing Member's positions.
7.3. The credit risk add-on may be imposed as an absolute dollar amount, or as a percentage add-on to a Clearing Member's maintenance margin requirements.