Past version: Effective up to 16 Jul 2019
| Issue date | Cross Reference | Enquiries |
| Added on 31 December 201331 December 2013 | Rule 7.30 | Please contact: Operations, Clearing and Depository Clearing Hotline Tel: (65) 6236 5319 Email: otclear@sgx.com SGX OTC Clearing Business Email: sgxotc@sgx.com SGX AsiaClear Commodities Clearing Business Email: asiaclear@sgx.com |
1. Introduction
1.1 Rules 7.30.1 and 7.30.2 provide that a Customer may opt for "Enhanced Customer Collateral Protection" ("ECCP") in respect of Non-Relevant Market Transactions and/or OTCF Transactions by requesting that its Clearing Member designate any of the Customer's Customer Accounts as an "Applicable Customer Account". Each such Customer is referred to as an "Applicable Customer". The Clearing Member shall inform each of its Customers of the availability of the choice for ECCP and shall offer ECCP to any Customer that requests for it.
1.2 This Practice Note provides information on—
(a) the requirement on a Clearing Member to inform its Customers of the availability of the choice for ECCP;
(b) the treatment of position and Collateral under the ECCP model; and
(c) the key benefits and costs to Customers of opting for ECCP.
2. Requirement to inform Customers of the availability of the choice for ECCP
2.1 Clearing Members that offer client clearing for Non-Relevant Market and/or OTCF Contracts are required to inform each of their Customers that the choice for ECCP is available.
2.2 Clearing Members should retain records of communication between themselves and their Customers, including communication by their Customers on whether they wish to opt for ECCP.
3. Treatment of position and Collateral under the ECCP model
Positions
3.1 Under Rule 7.30.3, the Clearing House will only treat a Customer Account as being an Applicable Customer Account where it has received information relating to the identity of the Applicable Customer from the relevant Clearing Member. This applies to both (i) individual position accounts, and (ii) omnibus position accounts.
3.2 Where a Customer opts for ECCP, its positions will be maintained on the Clearing House's records on a position account level. Clearing Members are required to maintain separate position accounts for each Applicable Customer by ensuring that each Applicable Customer's trades are correctly booked into the appropriate Applicable Customer Account in the clearing system. The positions of each such Applicable Customer Account will be clearly identified on the Clearing House's books and will not be commingled with other Customers' positions.
3.3 A customer omnibus position account that is the subject of ECCP will be treated as an Applicable Customer Account and ring-fenced from other Customer Accounts held with SGX-DC. However, each Customer within a customer omnibus position account will remain exposed to the risk of fellow customers within that same customer omnibus position account.
Collateral
3.4 The Clearing House will maintain records of Collateral in respect of each Applicable Customer Account. These records will be maintained for the purposes of margining and default management based on information provided by the relevant Clearing Member.
3.5 The Collateral records in respect of each Applicable Customer Account will be kept separate from the Collateral records of any other Customer Account held with SGX-DC. However, Collateral deposited in respect of Applicable Customer Accounts and non-Applicable Customer Accounts may be physically commingled in an omnibus account held with a bank, custodian or depository.
3.6 Collateral deposited in respect of all Customer Accounts (including Applicable Customer Accounts) will be kept separate from Clearing House's assets and Clearing Members' assets deposited for house obligations.
4. Benefits and Costs
4.1 Clearing Members should advise their Customers of the benefits and costs involved in opting for ECCPin order to facilitate an informed decision by their Customers.
4.2 ECCPprovides the following key benefits:
(a) Protection from fellow-customer risk
Non-Applicable Customers are technically exposed to a degree of risk in the default of another non-Applicable Customer. Section 60(1)(b) of the SFA and Regulation 24(1) of the Securities and Futures (Clearing Facilities) Regulations 2013 ("SFR (Clearing Facilities)") provide that the Clearing House may use Customer Collateral of non-Applicable Customers to meet obligations of a Clearing Member that arise from other non-Applicable Customers' contracts where certain conditions are met.
In contrast, Applicable Customers are protected from fellow-customer risk because SFR (Clearing Facilities) Regulation 24(2) provides that in the event of a default of a Clearing Member caused by a Customer, Collateral of a non-defaulting Applicable Customer will not be used to satisfy the obligations arising from the Contracts of such defaulting Customer. In the event of a default of a Clearing Member caused by an Applicable Customer, only the Collateral of such defaulting Applicable Customer will be used. Other Customers' Collateral will not be used.
Non-Applicable Customers are technically exposed to a degree of risk in the default of another non-Applicable Customer. Section 60(1)(b) of the SFA and Regulation 24(1) of the Securities and Futures (Clearing Facilities) Regulations 2013 ("SFR (Clearing Facilities)") provide that the Clearing House may use Customer Collateral of non-Applicable Customers to meet obligations of a Clearing Member that arise from other non-Applicable Customers' contracts where certain conditions are met.
In contrast, Applicable Customers are protected from fellow-customer risk because SFR (Clearing Facilities) Regulation 24(2) provides that in the event of a default of a Clearing Member caused by a Customer, Collateral of a non-defaulting Applicable Customer will not be used to satisfy the obligations arising from the Contracts of such defaulting Customer. In the event of a default of a Clearing Member caused by an Applicable Customer, only the Collateral of such defaulting Applicable Customer will be used. Other Customers' Collateral will not be used.
(b) Ease of porting
Clear identification of positions and associated Collateral in respect of each Applicable Customer Account enables Clearing House to accurately determine the minimum amount of Collateral each Applicable Customer has to deposit and will potentially expedite the porting of positions and associated Collateral in an event of default.
Clear identification of positions and associated Collateral in respect of each Applicable Customer Account enables Clearing House to accurately determine the minimum amount of Collateral each Applicable Customer has to deposit and will potentially expedite the porting of positions and associated Collateral in an event of default.
4.3 In consideration of the additional protection against fellow-customer risk that Applicable Customers receive, a margin add-on of 10% will be imposed on positions held in respect of Applicable Customer Accounts as compared to non-Applicable Customer Accounts. The differentiation in margining is required due to an Applicable Customer, as a corollary of obtaining protection from fellow-customer risk, no longer having the benefit of non-defaulting Customers sharing in the fulfilment of its obligations if it defaults. Higher margin is therefore required in respect of each Applicable Customer Account to maintain the existing level of safety in the clearing system.