SGX-DC Clearing Rules
Practice Note 2.13A — Business Continuity Requirements
| Issue Date | Cross Reference | Enquiries |
| Added on 22 January 200922 January 2009 | Rule 2.13A | Please contact Member Supervision: Facsimile No : 6538 8273 E-Mail Address: membersup@sgx.com |
1. Introduction
1.1 Rule 2.13A requires Clearing Members to:
(i) maintain adequate business continuity arrangements;
(ii) document business continuity arrangements in a business continuity plan;
(iii) test and review business continuity plans regularly; and
(iv) appoint emergency contact persons.
1.2 The objective is to ensure that Clearing Members have the ability to:
(i) React swiftly to emergency situations; and
(ii) Maintain critical functions and fulfill obligations to customers and counterparties in the event of major operational disruptions.
2. Business Continuity Plan
2.1 Critical Elements of a Business Continuity Plan
Rule 2.13A.1 requires Clearing Members to Clearing Members to maintain adequate business continuity arrangements, and document such arrangements in a business continuity plan. As a guide, a Clearing Member's business continuity plan should document the following elements:
Rule 2.13A.1 requires Clearing Members to Clearing Members to maintain adequate business continuity arrangements, and document such arrangements in a business continuity plan. As a guide, a Clearing Member's business continuity plan should document the following elements:
(i) Risk assessment: This includes a comprehensive assessment of business continuity risks (including financial and operational risks) and threat scenarios which may severely disrupt a Clearing Member's operations. Such scenarios may include prolonged power outages, IT system software or hardware failures, loss of voice or data communication links, acts of terrorism, and outbreak of infectious diseases;
(ii) Business impact analysis: This is an evaluation of the impact of the risks and threat scenarios identified in (i) above. The business impact analysis should identify critical business functions (including support operations and related information technology systems) and potential losses (monetary and non-monetary) to enable the Clearing Member to determine recovery strategies/priorities and recovery time objectives;
(iii) Work area recovery: This refers to continuity arrangements for a Clearing Member's critical functional capabilities in the event that the Clearing Member's primary office becomes inaccessible, for example, availability of a disaster recovery site ready for activation within a reasonable period of time;
(iv) Crisis communications: This refers to a communications plan for the Clearing Member to liaise with its internal and external stakeholders such as employees, customers and regulatory authorities during a crisis;
(v) Roles and responsibilities: This refers to the identification of a Clearing Member's key personnel and management staff, their roles and responsibilities, and reporting lines. Alternates should be identified to cover the responsibilities of absent key personnel.
(vi) Backup for critical functions*, information technology systems and data;
* Critical functions refer to business functions whose failure or disruption may incapacitate the firm.
* Critical functions refer to business functions whose failure or disruption may incapacitate the firm.
(vii) Key service providers: This refers to assessing a Clearing Member's dependencies on key service providers in recovery strategies and recovery time objectives, and taking steps to ensure that key service providers are capable of supporting the Clearing Member's business, even in disruptions;
^ Key service providers refer to third-parties who are performing functions that are not normally carried out by Clearing Members internally, but are critical to the Clearing Member's ability to carry on business operations. For example, IT system hardware/software vendors.
^ Key service providers refer to third-parties who are performing functions that are not normally carried out by Clearing Members internally, but are critical to the Clearing Member's ability to carry on business operations. For example, IT system hardware/software vendors.
(viii) Outsourcing service providers#: This refers to assessing whether the service provider has established satisfactory Business Continuity Plans commensurate with the nature, scope and complexity of the outsourced services; and
# Outsourcing service providers refer to third parties who are performing functions that would normally be performed by Clearing Members internally. For example, Operations and Technology.
# Outsourcing service providers refer to third parties who are performing functions that would normally be performed by Clearing Members internally. For example, Operations and Technology.
(ix) Any other elements that the Clearing Member deems necessary to be included in its business continuity plan or which the Clearing House may prescribe from time to time.
2.2 Emergency Response During Crisis
2.2.1 A Clearing Member should establish and maintain a crisis management plan as part of its business continuity plan. The crisis management plan should include (but not be limited to):
(i) Emergency response procedures;
(ii) Roles and responsibilities of the crisis management team;
(iii) Command and control structures; and
(iv) Salvage and restoration procedures.
2.2.2 The Clearing House may declare a wide-area crisis in the event of a major and widespread incident. When such declaration is made, the Clearing House may require a Clearing Member to submit status reports to the Clearing House. A wide-area crisis may include any incident where the operations of a large number of market participants are disrupted simultaneously.
2.3 Regular Review, Testing and Training
2.3.1 Rule 2.13A.4 requires a Clearing Member to review and test its business continuity plan regularly. Clearing Members should do so at least once a year to ensure that their business continuity plans remain relevant.
2.3.2 Where there are material changes to a Clearing Member's business activities and operations, the Clearing Member should update its business continuity plan accordingly. Regular training should be conducted for staff to be updated and aware of any relevant changes to the Clearing Member's business continuity arrangements. As a principle, training should be conducted when:
(i) changes have been made to the Clearing Member's BCP; and
(ii) new staff are recruited.
Clearing Members should also conduct refresher courses for existing staff where appropriate.
3. Emergency Contact Persons
3.1 Rule 2.13A.5 requires a Clearing Member to appoint emergency contact persons and furnish the contact information of such persons to the Clearing House. Clearing Members may appoint an emergency contact person and up to two (2) alternates. A template is attached as Appendix A to this Practice Note for the notification of contact information (postal address, email, telephone, mobile telephone and facsimile numbers) to the Clearing House.
Refer to Appendix A of Practice Note 2.13A.
Refer to Appendix A of Practice Note 2.13A.
3.2 Clearing Members are to ensure that the contact information provided to the Clearing House is updated on a semi-annual basis. Nonetheless, where there are changes to a Clearing Member's emergency contact persons and contact information, the Clearing Member should notify the Clearing House immediately in writing.
3.3 A Clearing Member's authorized emergency contact person should immediately notify the Clearing House in the event where:
(i) a Clearing Member's business operations are or will be significantly disrupted; and/or
(ii) a Clearing Member's business continuity plan is activated.
Practice Note 2.28A Procedures to Suspend Qualification of a Trading Member
| Issue Date | Cross Reference | Enquiries |
| 11 January 201111 January 2011 | Clearing Rules Rule 2.28A.3 and 2.28A.5 | Please contact: Member Supervision Facsimile No : 6538 8273 E-Mail Address : membersup@sgx.com Market Control Hotline : 6236 8433 |
1 Introduction
1.1 Rule 2.28A.3 states that a Clearing Member who wishes to suspend its clearing arrangement with a Trading Member, shall notify the Clearing House of its decision to suspend its clearing arrangement with that Trading Member, and comply with any reasonable direction of the Clearing House in relation to the suspension of the clearing of the Trading Member's trades.
1.2 Rule 2.28A.5 states that the Clearing Member shall clear and settle all the trades of the Trading Member which are done right up to the point when the Trading Member has been disabled from entering trades to be cleared by the Clearing Member.
1.3 This Practice Note sets out the operational procedures that a Clearing Member should follow to notify the Clearing House of its decision to suspend its clearing arrangement with a Trading Member.
2 Procedures for Suspending a Trading Member
Designated Officers
2.1 Clearing Members shall at all times have at least two Designated Officers whose role is to notify the Clearing House of the Clearing Member's decision to suspend a Trading Member.
2.2 For each Designated Officer, the Clearing Member shall submit to Market Control the Designated Officer's name, identification number, contact details, and a sealed envelop containing authentication information stipulated by Market Control. (For security reasons, the required authentication information will not be published in this Practice Note. Clearing Members are to contact Market Control regarding the required information.)
2.3 Clearing Members must promptly update Market Control of changes in Designated Officers, and any changes to a Designated Officer's information.
Notification of Suspension of Trading Member
2.4 Once a Clearing Member has decided to suspend a Trading Member, the Clearing Member's Designated Officer shall contact Market Control by telephone during trading hours at the Market Control Hotline, 6236 8433, and notify Market Control of the suspension.
2.5 Market Control will verify the identity of the caller by requiring the caller to respond correctly to two authentication questions.
2.6 If the caller is authenticated as the Clearing Member's Designated Officer, Market Control will effect the suspension of the Trading Member. The suspension will be effected within one hour of the authentication of the Designated Officer.
2.7 SGX will suspend the Trading Member's trading access and cancel all open orders for the suspended Trading Member. Market Control will notify the Designated Officer when this is done.
Final Traded Position
2.8 For the purposes of Rule 2.28A.5, the Clearing Member shall accept the Trading Member's final traded position as stated in the trade report produced by SGX.
2.9 For clarifications, the Clearing Member may call the Market Control Hotline, 6236 8433.
Added on 11 January 201111 January 2011 and amended on 15 September 201715 September 2017.
Practice Note 2.28A.1.3 — Pre-Execution Checks
| Issue Date | Cross Reference | Enquiries |
| Added on 15 March 201315 March 2013 amended on 14 November 201614 November 2016, 29 July 2022 and 25 April 2023. | Rule 2.28A.1.3 | Please contact Member Supervision: Facsimile No : 6538 8273 E-Mail Address : membersup@sgx.com |
1. Introduction
1.1 This Practice Note provides further details on the pre-execution checks contemplated in Rule 2.28A.1.3.
2. Pre-Execution Checks
2.1 Rule 2.28A.1.3 requires a Clearing Member, in order to clear the trades of a Trading Member, to satisfy the Clearing House that it has in place automated pre-execution credit control checks to monitor the Trading Member's trades and manage its risk exposure to such trades. The purpose of this is to prevent overtrading and for credit risk management purposes. As such, the checks must be appropriately set to effectively limit the firm's risk exposure to Trading Members to prevent the taking on of excessive risk.
2.2 [This paragraph is deleted.]
2.3 Clearing Members will be able to meet the requirement in Rule 2.28A.1.3 by using the appropriate pre-execution checks hosted by the Exchange, the Relevant Market, or the Connect Broker for the Connect Market, or by directly setting and controlling the appropriate pre-determined automated limits in the Trading Member's system, having automated alerts whenever such limits are altered, and by conducting regular post-execution reviews of trades. Clearing Members should assess and continue to ensure that the pre-execution risk management control checks are robust on an ongoing basis.
Added on 15 March 201315 March 2013 and amended on 14 November 201614 November 2016, 29 July 2022 and 25 April 2023.
Practice Note 2.28A.1.6 — Conflicts of Interest
| Issue Date | Cross Reference | Enquiries |
| Added on 15 March 201315 March 2013 | Rule 2.28A.1.6 | Please contact Member Supervision: Facsimile No : 6538 8273 E-Mail Address : membersup@sgx.com |
1. Introduction
1.1 This Practice Note provides guidance on how front office and back office functions of Clearing Members should be separated, in accordance with Rule 2.28A.1.6.
2. Separation of Key Functions
2.1 The purpose of separating a Clearing Member's various key functions is to minimise and manage conflicts of interests among these functions.
2.2 Examples of proper separation include:—
(a) the setting and authorising of credit limits on customers by senior management staff who are independent of sales and marketing functions, and are not related to the customer in question; and
(b) having adequate separation of management responsibilities e.g the heads of sales, dealing or marketing functions should not have responsibilities over the middle and back office functions of Clearing Members.
2.3 The basis for determining and amending credit limits should be properly documented. Adequate audit trail reports should be maintained to show all changes to credit limits, the date and time of the modifications and the authorised person who approved the changes. In addition, sufficient checks and procedures should be in place to ensure that all limits and parameters set and modified by the credit control administrator are accurate and have been approved.
Added on 15 March 201315 March 2013.
Practice Note 6.07A — Facilitator Agent
| Issue Date | Cross Reference | Enquires |
| Added on 1 October 20091 October 2009. | Rule 6.07A | Please contact: Operations, Clearing and Depository Email: otclear@sgx.com Clearing Hotline Tel: (65) 6236 5319 |
1. Introduction
1.1 Rule 6.07A states that the Clearing House may appoint any person as a Facilitator Agent to perform any function for the purpose of facilitating delivery by Clearing Members.
1.2 This Practice Note elaborates on the role of a Facilitator Agent, and sets out the Facilitator Agents appointed by the Clearing House, and the functions for which such Facilitator Agents are appointed.
2. Role of a Facilitator Agent
2.1 Where, upon maturity of a Contract settled by way of physical delivery of an underlying Commodity, a Clearing Member continues to hold open positions which have been cleared through the Clearing House, the Clearing House may facilitate delivery by such Clearing Member in accordance with the Contract Specifications.
2.2 The Clearing House may appoint a Facilitator Agent to carry out, on its behalf, any function to facilitate such delivery by a Clearing Member.
2.3 For the avoidance of doubt, where a Facilitator Agent is appointed, the rights and liabilities (including any exclusion or limitation of liability) as between the Clearing House and Clearing Members in relation to physical delivery provided under Chapter 6 of this Rules, shall continue to apply.
3. Facilitator Agent for Contracts Traded on the Singapore Commodity Exchange Limited ("SICOM") and Settled by Way of Physical Delivery
3.1 In respect of Contracts matched and executed on SICOM and cleared through the Clearing House, SICOM shall be appointed as the Clearing House's Facilitator Agent.
3.2 SICOM shall, on behalf of the Clearing House, perform all functions required to facilitate delivery by Clearing Members in accordance with the relevant Delivery Rules except all matters in relation to Clearing Members' monies.
3.3 The functions performed by SICOM shall include:
a) matching of Clearing Members with open positions after the Last Trading Day, in accordance with the Contract Specifications;
b) acceptance of any documents, or instruments (other than monies) from any Clearing Member required pursuant to the relevant Delivery Rules for the purpose of effecting delivery;
c) release of any documents or instruments (other than monies of a Clearing Member) to any party in accordance with the Contract Specifications; and
d) receipt of notification of any claims in relation to the performance of Delivery Obligations from any Clearing Member.
3.4 Except for matters in relation to Clearing Members' monies, Clearing Members effecting delivery through the Clearing House shall deal directly with SICOM in the performance of their Delivery Obligations, regardless of whether its counterparty is a Clearing Member, or a clearing member of SICOM.
3.5 Clearing Members shall deal directly with the Clearing House in respect of all matters relating to monies under the Contract Specifications.
Practice Note 7.11.1.1 — Daily Settlement Procedures for Eligible Non-Relevant Market Contracts
| Issue Date | Cross Reference | Enquires |
| Added on 22 September 200622 September 2006 and amended on 23 November 200923 November 2009 and 8 November 20128 November 2012. | Rule 7.11.1.1 | Please contact: Operations, Clearing and Depository Clearing Hotline Tel: (65) 6236 5319 Email: otclear@sgx.com SGX OTC Clearing Business Email: sgxotc@sgx.com |
1. Introduction
1.1 This Practice Note describes the procedures for determining Daily Settlement Prices for Eligible Non-Relevant Market Contracts.
1.2 Daily Settlement Price is the official daily closing price of a Contract determined in accordance with SGX-DC Clearing Rule 7.11.1.1. An Eligible Non-Relevant Market Contract is any Non-Relevant Market Contract accepted by the Clearing House for clearing, subject to SGX-DC Clearing Rules, as prescribed by the Clearing House from time to time.
1.3 The procedures in this Practice Note shall only be applicable for determining the Daily Settlement Price of an Eligible Non-Relevant Market Contract from the first trading day to one day before last trading day.
The formulas for the computation of Daily Settlement Prices on the last trading day, otherwise also known as Final Settlement Prices, are provided in Appendix 1 of SGX-DC Clearing Rules.
Refer to Appendix 1.
Refer to Appendix 1.
2. Procedures
2.1 Clearing House shall prescribe a list of Price Contributors for each Eligible Non-Relevant Market Contract.
2.2 Clearing House shall obtain daily price assessments for each Eligible Non-Relevant Market Contract from each Price Contributor.
2.3 The Daily Settlement Price for a contract month shall be the weighted average price assessments provided by each Price Contributor, whose weight shall be decided by Clearing House. Clearing House may discard the lowest or highest assessments before averaging.
2.4 In the event that no price assessment is obtained for a contract month, the Daily Settlement Price for that contract month shall be interpolated using the following but not limited to:
a) available price assessments for preceding months and following months;
b) current month's spot assessments;
c) prices of registered transactions.
3. Price Contributors
3.1 The Price Contributors for each Eligible Non-Relevant Market Contracts group are:
Oil Swaps
Oil Swaps
a) Platts
b) Forward Market Curve Limited
c) Market Participants
Freight Forward Contracts
a) The Baltic Exchange Limited
Iron Ore Swaps
a) Market Participants
Practice Note 7.11.1.2 — Daily Settlement Price Methodology
| Issue date | Cross Reference | Enquiries |
| Added on 22 September 200622 September 2006 and amended on 1 October 20091 October 2009, 24 January 201124 January 2011, 8 November 20128 November 2012 and 14 November 201614 November 2016. | Rule 7.11.1.2 | Please contact Derivatives: Telephone No: 6236 8888 |
1. Introduction
Rule 7.11.1.2 of the Clearing Rules states that the Daily Settlement Price for Contracts other than Non-Relevant Market Contracts shall be determined by the Clearing House in accordance with the relevant formula and procedures applicable to each Contract. In arriving at such formula, the Clearing House may, in consultation with the Exchange, take into account factors, including but not limited to:
a) the last traded price;
b) bid and offer spread at the close of market;
c) price data derived from pricing models, as selected or established by the Clearing House from time to time.
This Practice Note sets out the formulas and methodologies used by the Clearing House to compute the Daily Settlement Price as contemplated in the above Rule.
2. Methodology for Computation of Daily Settlement Price
2.1 Most Commonly Adopted Methodology.
Save for exceptional situations, the Clearing House can use any one of the following methodologies to compute the Daily Settlement Price:
Save for exceptional situations, the Clearing House can use any one of the following methodologies to compute the Daily Settlement Price:
a) a price determined by a pre-closing routine; or
b) a price derived from the prices in the closing range;
c) a price determined by taking into account typical spread relationships with other Contract Months in the relevant Contract;
d) a price determined by theoretical pricing models selected by the Clearing House; or
(e) a price determined through polling, conducted by the Clearing House, of market participants and/or any other price source deemed as reliable by the Clearing House.
Higher bid or lower offer prices at the close may be used by the Exchange in the computation of the Daily Settlement Price under methodologies b, c and d.
2.2 Exceptional Situations.
In exceptional cases when none of the methodologies set forth in paragraph 2.1 above yields a Daily Settlement Price that is reflective of market conditions, the Clearing House may use any of the following alternative methodologies for the computation of the Daily Settlement Price:
In exceptional cases when none of the methodologies set forth in paragraph 2.1 above yields a Daily Settlement Price that is reflective of market conditions, the Clearing House may use any of the following alternative methodologies for the computation of the Daily Settlement Price:
a) in regards to Futures Contracts, the Daily Settlement Price may be set at a price which when compared to the Daily Settlement Price of the next Contract Month reflects the same differential that existed between the two Contract Months on the previous day, unless there is a higher bid or lower offer in existence at the close. In such case, the higher bid or lower offer may be the Daily Settlement Price; or
b) in regards to Futures Contracts or Options Contracts, such other price that the Clearing House determines to be reflective of prevailing market conditions.
"Option Contracts" and "Futures Contracts" shall have the meaning ascribed to them in the Trading Rules.
2.3 [This paragraph is deleted.]
Practice Note 7.22 — Margins of Third Parties
| Issue date | Cross Reference | Enquiries |
| Added on 23 July 201423 July 2014 and amended on 25 January 201725 January 2017. | Rule 7.22 | Please contact Member Supervision: Facsimile No: 6538 8273 |
1. Introduction
1.1 Rule 7.22 sets out Clearing Members' obligations in relation to the collection of margins from Third Parties (including Customers). This Practice Note elaborates on those obligations.
2. Margin Rates and Acceptable Forms of Margins
2.1 Margin System
Standard Portfolio Analysis of Risk Margin System
2.1.1 The Standard Portfolio Analysis of Risk Margin System ("SPAN") is the risk margin system adopted by the Exchange and the Clearing House. Margin requirements generated by SPAN shall constitute the Exchange's and the Clearing House's minimum margin requirements ("minimum margin requirements").
2.1.2 SPAN is a risk-based, portfolio approach margining system used to compute minimum overall margin requirements for a portfolio of positions in Contracts. SPAN requirements are computed using risk parameter files which are distributed at least daily by the Clearing House.
2.1.3 The margin requirements computed under SPAN have two components: the risk component, which accounts for potential changes in the market price and volatility of the Futures Contract1, and the equity component, which is the value of the Option Contract2 marked to the current day's settlement price. If the net option value in a Customer Account is short, it is added to the risk margins to increase the margin requirements. If the net option value is long, it may be applied towards reducing the risk margin requirements.
2.1.4 All Clearing Members are advised to use SPAN for Contracts. Clearing Members may use margining systems other than SPAN to compute the minimum margin requirements provided the Clearing Members can demonstrate that their systems will always produce margin requirements equal to or greater than the SPAN margin requirements.
2.2 Margin Rates and Requirements (Rule 7.22.1)
2.2.1 Margin rates and requirements on Contracts are prescribed by the Clearing House. Under Rule 7.22.1, Clearing Members are required to procure initial margins from their Customers and ensure that their Customers comply with maintenance margins for such amounts as required by the Clearing House.
2.2.2 For contracts listed in other exchanges, Clearing Members shall ensure that their Customers comply with initial margins and maintenance margins prescribed by the relevant exchanges or clearing houses.
2.2.3 [Deleted]
2.2.4 Clearing Members may, at their discretion, set higher margin rates/requirements than that required by the Clearing House. Clearing Members shall review their internal margin rates/requirements on a continual basis to ensure compliance with the required minimum initial margins and maintenance margins prescribed by the Clearing House.
2.3 Acceptable Forms of Margins (Rule 7.22.2)
2.3.1 Pursuant to Rule 7.22.2, the Clearing House has prescribed a list of instruments which Clearing Members may accept from Customers for meeting their required initial margins and maintenance margins.
2.3.2 A list of the acceptable instruments and their prescribed maximum valuations can be found on the Exchange's website (http://www.sgx.com).
2.3.3 Where a Clearing Member does not have physical possession of Japanese Government Bonds or securities listed on the First Section of Tokyo Stock Exchange, the Clearing Member shall be deemed to have complied with the requirements of Rule 7.22.2 if the Clearing Member can obtain written confirmation from a financial institution in Singapore or in Japan, that the financial institution is holding such securities from the Customers, as custodian for the Clearing Member concerned.
2.3.4 Bank certificates of deposits, including fixed deposits, may be accepted as good security under the following terms and conditions:
(1) the Customer signs a memorandum of charge of its deposits in favour of the Clearing Member. The memorandum shall operate as an equitable assignment which entitles the Clearing Member to payment out of the monies in the accounts;
(2) where a memorandum of charge is given by a corporate Customer, the Clearing Member shall ensure that the memorandum is registered with the Accounting and Corporate Regulatory Authority ("ACRA") (with the filing of the necessary forms). The Clearing Member shall also make a search at ACRA to ensure that there is no prior charge of the same account to other persons;
the Clearing Member shall also ensure that it receives a confirmation from the bank that the required amount is deposited with the bank and has not been subjected to any banker's lien or right of set-off or consideration, or any other lien or charge. The Clearing Member shall notify the bank of the memorandum of charge as soon as it is executed so that the bank withholds all further payments to its Customer unless such payments are made with the consent of the Clearing Member. The Clearing Member shall document proof of such notice; and
(3) where a memorandum of charge is given by a Customer who is an individual, the Clearing Member shall cause the Customer to authorise the bank to disclose to the Clearing Member whether there have been notices of earlier charges and the details thereof, if any. This is to ensure that there is no prior charge of the same account to other persons.
2.3.5 The Clearing House has prescribed that where gold certificates issued by banks approved by MAS or gold bars are used to margin open short gold futures positions, the maximum valuation of these instruments shall be one hundred (100) percent of market value. If these instruments are used for margining positions other than open short gold futures positions, the maximum valuation of these instruments shall be seventy (70) percent of market value.
2.3.6 Clearing Members are allowed to apply a more conservative valuation (that is, less than the maximum valuation prescribed) on the acceptable instruments.
3. Margin Calls (Rules 7.22.1 and 7.22.4)
3.1 Issuance of Margin Calls
3.1.1 Margin calls are issued to collect the required margins to ensure the performance of a contract. A margin call is a request from a Clearing Member to a Customer to deposit additional margins.
3.1.2 Pursuant to Rule 7.22.4, whenever a Customer's total net equity falls below the maintenance margins, the Customer Account shall be deemed to be under-margined. The under-margined amount is equal to the difference between the Customer's initial margins and the Customer's total net equity. This is the minimum amount that the Clearing Member must call from the Customer in order to restore the Customer's total net equity to the initial margins level.
3.1.3 Margin calls shall be made within one Trading Day after the occurrence of the event giving rise to the margin calls.
3.1.4 A Clearing Member may, at their discretion, call for additional margins or issue margin calls on a more frequent basis, including the issuance of intra-day margin calls.
3.2 Computation of Margin Calls
3.2.1 In determining margin calls, Customer Accounts shall be reviewed at the close of the Trading Day. All Customer Accounts opened by the same Customer, for the benefit of its own clients shall be combined in one group. All other Customer Accounts opened by the same Customer shall be combined in a separate group. Below is an example to illustrate the treatment of the accounts opened by Customer XYZ under the following scenarios:
(1) XYZ — proprietary A/C 1
XYZ — client omnibus A/C 2
Treatment : A/C 1 and A/C 2 should be treated as separate accounts for the purpose of computing margin calls.
XYZ — client omnibus A/C 2
Treatment : A/C 1 and A/C 2 should be treated as separate accounts for the purpose of computing margin calls.
(2) XYZ — proprietary A/C 1A
XYZ — proprietary A/C 1B
Treatment : A/C 1A and A/C 1B should be combined when computing margin calls.
XYZ — proprietary A/C 1B
Treatment : A/C 1A and A/C 1B should be combined when computing margin calls.
(3) XYZ — client speculative A/C 2A
XYZ — client omnibus A/C 2B
Treatment : A/C 2A and A/C 2B should be combined when computing margin calls.
XYZ — client omnibus A/C 2B
Treatment : A/C 2A and A/C 2B should be combined when computing margin calls.
3.2.2 If Customer Accounts are not combined in accordance with paragraph 3.2.1 above, there is a risk that the Clearing Member may either fail to issue a margin call or understate the amount required under a margin call. This is illustrated below:
Assume proprietary A/C A & proprietary A/C B are owned by the same Customer:
In the above example, if the two accounts are not combined, the Customer as a whole would be subjected to a lesser margin call of $18,000 instead of $26,000.
Assume proprietary A/C A & proprietary A/C B are owned by the same Customer:
| A/C A $ | A/C B $ | Combined $ | |
| Total net equity | 8,000 | 42,000 | 50,000 |
| Initial margins | 26,000 | 50,000 | 76,000 |
| Maintenance margins | 21,000 | 40,000 | 61,000 |
| Under-margined | 18,000 | Nil | 26,000 |
| Margin Call Required | 18,000 | Nil | 26,000 |
In the above example, if the two accounts are not combined, the Customer as a whole would be subjected to a lesser margin call of $18,000 instead of $26,000.
3.3 Reduction and Deletion of Margin Calls
3.3.1 A Clearing Member may:
(1) reduce the amount required under a margin call through a receipt of cash and other acceptable forms of margins which are less than the amount required under the margin call. The Customer is still required to meet the remaining amount required under the margin call; and
(2) consider the total margin call to be satisfied if the Customer's total net equity is equal to or greater than the Customer's initial margins as of the close of the Trading Day.
3.3.2 A Clearing Member shall reduce a Customer's oldest outstanding margin call first. Individual margin calls shall be aged separately throughout their existence. A Customer's total margin call is the sum of all individually aged margin calls. A Clearing Member's records shall clearly indicate the age of all margin calls issued and outstanding.
3.3.3 In order to protect the age of outstanding margin calls for re-established positions, the liquidation and re-establishment of positions during the same Trading Day to circumvent paragraph 3.3.2 is not allowed.
3.3.4 Where a Customer is meeting a margin call by remitting cash funds, Clearing Members shall take into consideration only those funds that they have actually received when determining whether the Customer's total net equity has been restored to the initial margins level. Clearing Members shall not treat cash funds as received even though the Customer's remittance indicates that the funds would be forthcoming on a future value date. Clearing Members are not allowed to use the Customer's confirmation that the funds are forthcoming to reduce or delete a margin call as the funds have yet to be received.
3.4 Recording and Monitoring
3.4.1 A Clearing Member is required to keep written records which should include the following in respect of each Customer:
(1) all margin calls, whether made in writing or by telephone and the number of days such calls are outstanding; and
(2) all reductions and deletions of margin calls and the dates they occurred.
3.4.2 Any manual adjustments made to equity system reports to determine a Customer's margin status (e.g. adjustments to margin requirements, margin calls, etc.) shall be maintained on file.
3.4.3 Clearing Members shall maintain a proper monitoring system to ensure that all Customers who are under-margined are subject to prompt margin calls and that such calls are being properly monitored and followed up in order to restore the relevant Customers' total net equity to the initial margins levels.
3.5 Ageing of Margin Calls
3.5.1 In ageing margin calls, for the purpose of determining whether calls are met within the reasonable period:
T = trade date/ date that the Customer's total net equity falls below the maintenance margins
1 = first Trading Day after the date that the Customer's total net equity falls below the maintenance margins
2 = second Trading Day after the date that the Customer's total net equity falls below the maintenance margins
3 = third Trading Day after the date that the Customer's total net equity falls below the maintenance margins
Reasonable period shall have the meaning ascribed to it in Rule 7.22.
1 = first Trading Day after the date that the Customer's total net equity falls below the maintenance margins
2 = second Trading Day after the date that the Customer's total net equity falls below the maintenance margins
3 = third Trading Day after the date that the Customer's total net equity falls below the maintenance margins
Reasonable period shall have the meaning ascribed to it in Rule 7.22.
3.6 Examples
The following examples illustrate how margin calls are aged, reduced and deleted.
Assumptions:
(1) Customer's total net equity and margin requirements are as of the close of the respective Trading Days indicated.
(2) The Customer was properly margined on the previous Trading Day (Friday). If an individual margin call is required to be issued, the margin call shall equal: initial margins — total net equity
Example 1 — Issuing of margin calls due to unfavourable market movements
Margin calls must be issued no later than one Trading Day after the date that the Customer's total net equity falls below the maintenance margins.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 50,000 | 49,000 | 44,000 | 44,000 |
| Initial margins | 60,000 | 60,000 | 60,000 | 60,000 |
| Maintenance margins | 50,000 | 50,000 | 50,000 | 50,000 |
| UNDER-MARGINED | Nil | 11,000 | 16,000 | 16,000 |
| Unfavourable market movements [UMM] of $1,000 occurred on Tuesday and $5,000 on Wednesday. No margins were deposited. | ||||
| CALL RE'QD/(AGE) | -0- | 11,000 (T) | 11,000 (1) | 11,000 (2) |
| 5,000 (T) | 5,000 (1) | |||
| Customer Account is under-margined | Clearing Member must issue margin call of $11,000 no later than today. | Clearing Member must issue margin call of $5,000 no later than today. | ||
| Additional margin call of $5,000 required due to UMM. | ||||
Example 2 — Impact on margin calls due to liquidation of positions
Margin calls cannot be reduced/deleted if the liquidation does not restore the Customer's total net equity to or above initial margins.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 45,000 | 45,000 | 45,000 | 45,000 |
| Initial margins | 60,000 | 55,000 | 55,000 | 50,000 |
| Maintenance margins | 55,000 | 53,000 | 53,000 | 48,000 |
| UNDER-MARGINED | 15,000 | 10,000 | 10,000 | 5,000 |
| Positions were liquidated on Tuesday reducing initial margins by $5,000 and maintenance margins by $2,000 and on Thursday reducing initial margins by $5,000 and maintenance margins by $5,000. No margins were deposited. | ||||
| CALL RE'QD/(AGE) | 15,000 (T) | 15,000 (1) | 15,000 (2) | 15,000 (3) |
| Margin call cannot be reduced or deleted as the liquidation did not result in total net equity equal to or exceed initial margins. | Margin call cannot be reduced or deleted as the liquidation did not result in total net equity equal to or exceed initial margins. | |||
Example 3 — Impact on margin calls due to receipt of margin deposits
Margin calls can be reduced by the amount of margins actually received.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 50,000 | 45,000 | 44,000 | 47,000 |
| Initial margins | 60,000 | 60,000 | 60,000 | 60,000 |
| Maintenance margins | 55,000 | 55,000 | 55,000 | 55,000 |
| UNDER-MARGINED | 10,000 | 15,000 | 16,000 | 13,000 |
| Unfavourable market movements [UMM] of $5,000 occurred on Tuesday and $1,000 on Wednesday. Cash of $3,000 was deposited on Thursday. | ||||
| CALL RE'QD/(AGE) | 10,000 (T) | 10,000 (1) | 10,000 (2) | 7,000 (3) |
| 5,000 (T) | 5,000 (1) | 5,000 (2) | ||
| 1,000 (T) | 1,000 (1) | |||
| Additional margin call of $5,000 required due to UMM. | Additional margin call of $1,000 required due to UMM. | Margin call of $10,000 can be reduced by the cash receipt of $3,000. | ||
Example 4 — Impact on margin calls due to favourable market movements that are less than total margin call outstanding
Margin calls cannot be reduced/deleted if favourable market movements do not restore the Customer's total net equity to or above initial margins.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 55,000 | 58,000 | 52,000 | 58,000 |
| Initial margins | 60,000 | 60,000 | 60,000 | 60,000 |
| Maintenance margins | 58,000 | 58,000 | 58,000 | 58,000 |
| UNDER-MARGINED | 5,000 | No (see below) | 8,000 | No (see below) |
| Favourable market movements [FMM] of $3,000 occurred on Tuesday. Unfavourable market movements [UMM] of $6,000 occurred on Wednesday. FMM of $6,000 occurred on Thursday. No margins were deposited. | ||||
| CALL RE'QD/(AGE) | 5,000 (T) | 5,000 (1) | 5,000 (2) | 5,000 (3) |
| 3,000 (T) | 3,000 (T) | |||
| Margin call of $5,000 cannot be reduced or deleted as FMM did not result in total net equity equal to or exceed initial margins. | Additional margin call of $3,000 required due to UMM. | Margin call of $5,000 and $3,000 cannot be reduced or deleted as FMM did not result in total net equity equal to or exceed initial margins. | ||
Example 5 — Impact on margin calls due to favourable market movements that exceed total margin call
Margin calls can be deleted if favourable market movements restore the Customer's total net equity to or above initial margins.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 54,000 | 51,000 | 58,000 | 60,000 |
| Initial margins | 60,000 | 60,000 | 60,000 | 60,000 |
| Maintenance margins | 55,000 | 55,000 | 55,000 | 55,000 |
| UNDER-MARGINED | 6,000 | 9,000 | No (see below) | -0- |
| Unfavourable market movements [UMM] of $3,000 occurred on Tuesday. Favourable market movements [FMM] of $7,000 occurred on Wednesday and $2,000 on Thursday. No margins were deposited. | ||||
| CALL RE'QD/(AGE) | 6,000 (T) | 6,000 (1) | 6,000 (2) | -0- |
| 3,000 (T) | 3,000 (1) | |||
| Additional margin call of $3,000 required due to UMM. | Margin call of $6,000 was not reduced or deleted as FMM did not result in total net equity equal to or exceed initial margins. | Total margin call of $9,000 deleted as total net equity equals initial margins. | ||
Example 6 — Impact on margin calls due to favourable market movements plus receipt of margins that exceed total margin call
Margin calls can be deleted if favourable market movements and receipt of margins restore the Customer's total net equity to or above initial margins.
| Monday | Tuesday | Wednesday | Thursday | |
| Total net equity | 50,000 | 52,000 | 52,000 | 61,000 |
| Initial margins | 60,000 | 60,000 | 60,000 | 60,000 |
| Maintenance margins | 58,000 | 58,000 | 58,000 | 58,000 |
| UNDER-MARGINED | 10,000 | 8,000 | 8,000 | -0- |
| Favourable market movements [FMM] of $2,000 occurred on Tuesday. Cash of $9,000 was deposited on Thursday. | ||||
| CALL RE'QD/(AGE) | 10,000 (T) | 10,000 (1) | 10,000 (2) | -0- |
| Margin call of $10,000 was not reduced or deleted as FMM did not result in total net equity equal to or exceed initial margins. | As both cash receipt and FMM caused total net equity to exceed initial margins, the margin call of $10,000 was deleted. | |||
4. Under-Margined Accounts (Rule 7.22.3)
4.1 Acceptance of Orders
4.1.1 A Clearing Member shall only allow a Customer to incur a new trade when the required margins are on deposit or forthcoming within a reasonable period.
4.1.2 In a situation where a Customer has failed to place margins within the reasonable period, such that the Customer's total net equity is not restored to the initial margins level, the Clearing Member concerned:
(1) is required to promptly take all necessary actions including but not limited to closing all or such part of the Customer's positions to restore the Customer's total net equity to the initial margins level; and
(2) shall not accept orders for new trades, including day trades, for such Customers. However, orders which would result in reducing the Customer's maintenance margins requirements may be accepted by the Clearing Member.
4.1.3 A Clearing Member shall not accept orders for the purchase of option contracts unless the full amount of premium is on deposit or forthcoming within a reasonable period.
4.1.4 For settlement currency denominated in Japanese Yen, 'reasonable period' means a period which shall not exceed three (3) Trading Days from the trade date (T+3). For all other settlement currencies, it means a period which shall not exceed two (2) Trading Days from the trade date (T+2).
4.1.5 For example, if a Clearing Member has received indication from the Customer's banker on T + 1, that the Customer has remitted cash of US$1 million for value date T + 4, the Clearing Member shall not treat the US$1 million as part of the Customer's ledger balance on T + 1, as the funds would actually be received by the Clearing Member only on the value date of T + 4. The amount shall be accounted as part of Customer's ledger balance only on close of business T + 4. In the above example, since the Customer's funds are not forthcoming within the reasonable period (i.e. by the close of business T + 2), the Customer is not allowed to incur any new trade during this period (T + 1 and T + 2) except for trades which reduce the Customer's maintenance margins requirements.
4.1.6 In a situation where a Customer has liquidated all its positions resulting in a negative total net equity, the Clearing Member shall not accept orders for the Customer until sufficient funds or acceptable instruments are deposited such that total net equity is no longer negative.
4.1.7 The following indicates what is the allowable trading activity for a Customer whose total net equity is not restored to the initial margins level after a margin call:
(A) During the reasonable period,
(i) if the Clearing Member receives indication from the Customer that margins are forthcoming within the reasonable period
Allowable Trading Activity Within The Reasonable Period
Allowable Trading Activity Within The Reasonable Period
| Trading Activity | Risk Increasing | Risk Neutral | Day Trading | Risk Reducing |
| Allowed for Customer | Yes | Yes | Yes | Yes |
(ii) if the Clearing Member receives indication from the Customer that margins are forthcoming after the reasonable period or that no funds are forthcoming
Allowable Trading Activity Within The Reasonable Period
Allowable Trading Activity Within The Reasonable Period
| Trading Activity | Risk Increasing | Risk Neutral | Day Trading | Risk Reducing |
| Allowed for Customer | No | No | No | Yes |
(B) Beyond the reasonable period,
Allowable Trading Activity Beyond The Reasonable Period
Allowable Trading Activity Beyond The Reasonable Period
| Trading Activity | Risk Increasing | Risk Neutral | Day Trading | Risk Reducing |
| Allowed for Customer | No | No | No | Yes |
In the above examples:
A risk increasing trade is the establishment or closure of a position in a contract which increases a Customer's maintenance margins requirement (e.g. closing one leg of a spread position).
A risk neutral trade is the establishment of a position in a contract which does not impact a Customer's maintenance margins requirement (e.g. spread trades that do not impact maintenance margins requirements).
A risk reducing trade is the establishment or closure of a position in a contract which reduces the Customer's maintenance margins requirement (e.g. liquidation of a naked open position).
A risk increasing trade is the establishment or closure of a position in a contract which increases a Customer's maintenance margins requirement (e.g. closing one leg of a spread position).
A risk neutral trade is the establishment of a position in a contract which does not impact a Customer's maintenance margins requirement (e.g. spread trades that do not impact maintenance margins requirements).
A risk reducing trade is the establishment or closure of a position in a contract which reduces the Customer's maintenance margins requirement (e.g. liquidation of a naked open position).
4.2 Prohibition of Financing of Trading Margins
4.2.1 Under no circumstances shall a Clearing Member enter into any financing arrangement with any Customer to allow the Customer to trade without placing the required minimum margins. This shall not apply to a Bank Trading Member or Bank Clearing Member.
4.3 Monitoring Procedures
4.3.1 A Clearing Member is required to maintain proper monitoring and internal control procedures to ensure that the requirements under Rule 7.22 are complied with at all times.
4.4 Examples
Assumptions:
(1) All accounts are Customer Accounts.
(2) All margin calls are properly issued and aged for the full amount.
(3) The Customer's initial margins and maintenance margins remain unchanged.
(4) The Customer was properly margined on the previous Trading Day (Friday).
(5) The Customer has indicated that margins are forthcoming within the reasonable period.
Example 1 — Under-margined beyond reasonable period — Deletion of margin calls
Trading is allowed within reasonable period but no trading is allowed beyond reasonable period except for risk reducing trades until the Customer's total net Equity is restored to the initial margins level.
Week 1
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| AMT U/M | 5,000 | 5,000 | 5,000 | 5,000 | -0- |
| CALL/AGE | 5,000 (T) | 5,000 (1) | 5,000 (2) | 5,000 (3) | |
| TRADING | All* | All | All | RR** | All |
* All trading activity
** Only risk reducing trades
Assuming the margin call is in US Dollars, the reasonable period is T + 2, which is as of the close of business on Wednesday. As of Thursday, the Customer cannot be allowed to incur any risk increasing, risk neutral or day trades. The Customer can only be allowed to incur risk reducing trades.
On Friday, a cash deposit of $5,000 was received to delete the margin call. Once the Customer's total net equity is restored to the initial margins level, all trading activities would be allowed.
Example 2 — Under-margined beyond reasonable period — Deletion and reduction of margin calls
Trading is allowed within reasonable period but no trading is allowed beyond reasonable period except for risk reducing trades until the Customer's total net equity is restored to the initial margins level.
Week 1
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| AMT U/M | 10,000 | 10,000 | 10,000 | 10,000 | 15,000 |
| CALL/AGE | 10,000 (T) | 10,000 (1) | 10,000 (2) | 10,000 (3) | 10,000 (4) 5,000 (T) |
| TRADING | All* | All | All | All | RR** |
| Unfavourable market movements of JPY 5,000 occurred on Friday. | |||||
Assuming the margin call is in Japanese Yen, the reasonable period is T + 3, which is as of the close of business on Thursday. As of the close of business on Thursday, the Customer's total net equity was not restored to the initial margins level. Thus on Friday, the Customer can only be allowed to incur risk reducing trades.
Week 2
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| AMT U/M | 15,000 | 5,000 | 4,000 | 1,000 | 1,000 |
| CALL/AGE | 10,000 (5) 5,000 (1) | 5,000 (2) | 5,000 (3) | 2,000 (4) | 2,000 (5) |
| TRADING | RR** | All* | All | RR | RR |
| Favourable market movements of JPY 1,000 occurred on Wednesday. | |||||
* All trading activity
** Only risk reducing trades
On Tuesday of Week 2, cash deposit of JPY 10,000 was received which deleted the outstanding margin call of JPY10,000. After this, the only margin call of JPY 5,000 is still within the reasonable period of T + 3. Thus during this period, Tuesday and Wednesday, all trading is allowed. On the close of business on Wednesday, the Customer's total net equity was not restored to the initial margins level. On Thursday, cash of JPY3,000 was received which reduced the margin call to JPY2,000. As the Customer Account is still under-margined with a margin call of JPY2,000 outstanding beyond the reasonable period, the Customer on Thursday and Friday can only be allowed to incur risk reducing trades.
5. Omnibus Accounts and Other Margin Policies (Rule 7.22.1)
5.1 Omnibus Accounts
5.1.1 Omnibus Accounts generally contain concurrent long and short positions. Clearing Members shall ensure that positions in an Omnibus Account are carried and margined on a gross basis.
5.1.2 A Clearing Member shall obtain and maintain written instructions from undisclosed Omnibus Account holders for positions which are entitled to be margined as spread positions.
5.1.3 For purchase and sale offsets, a Clearing Member shall obtain and maintain written instructions from undisclosed Omnibus Account holders on a daily basis. If no such instructions are received, the Clearing Member must assume that the positions belong to separate owners. These positions must be margined on a gross basis.
5.2 Grouping of Accounts
5.2.1 For the purpose of margin computation, positions in accounts belonging to the same beneficial owner who may be the Customer or a client of the Customer, may be combined. Concurrent speculative long and short positions may also be netted in such accounts.
5.2.2 Accounts which are owned by different legal entities e.g. related corporations must be treated separately for margin computation purposes.
5.3 Excess Margins Payments
5.3.1 Pursuant to Rule 7.22, a Clearing Member may allow its Customers to withdraw Excess Margins3. The withdrawal of Excess Margins must be supported by proper documentation.
5.3.2 If the net option value is long, it may be applied towards reducing the risk margin requirements. However, option value in excess of initial margins cannot be treated as Excess Margins available for disbursement. The computation of Excess Margins available for disbursement treats option value differently from all other margins. This is because option value is not a cash asset and does not form part of Customer's total net equity.
5.3.3 For example, Customer deposits $1,000 in its account. It then purchases an option contract where the option premium is $1,000. At the time of purchase, the full premium of $1,000 is deducted from its account resulting in zero total net equity. Thus, there are no funds available for withdrawal. The option value of the long option position, which at the time of purchase is $1,000 (option value would vary with passage of time), cannot be available for withdrawal as it does not form part of the Customer's total net equity. Furthermore, the Clearing Member would be deemed to be financing the Customer's trades, which is prohibited under these guidelines, in the purchase of the option contract if the option value is allowed to be withdrawn.
5.3.4 If total net equity is zero or negative, a disbursement cannot be made as there are no funds available. The Clearing Member shall use the Customer's latest available total net equity and latest required initial margins to determine the amount of Excess Margins available for disbursement, notwithstanding that the Customer (e.g. a Customer in different time zone) has yet to receive the latest Customer statement sent out by the Clearing Member. In determining the Excess Margins available for disbursement, the Clearing Member shall take into consideration the Customer's incoming remittance and the Clearing Member's disbursement based on value dates. If an incoming remittance is accounted for in determining the amount of Excess Margins to be released, the Clearing Member shall effect the disbursement only after the receipt of the funds. This means that the value date for the disbursement shall be subsequent to the value date of the Customer's incoming remittance.
5.3.5 For the purpose of determining the amount of Excess Margins available for disbursement, all Customer Accounts opened by the same Customer, for the benefit of its own clients shall be combined in one group ("Group A"). All other Customer Accounts opened by the same Customer shall be combined in a separate group ("Group B"). If the Clearing Member does not combine such accounts, it runs the risk of allowing a Customer to withdraw more funds than what the Customer actually has available with the Clearing Member [see Example 4 below for illustration]. Available Excess Margins from Group A cannot be used for disbursement for Group B and vice versa.
5.4 Examples
Note: In the computation, if the net option value is greater than the initial margin risk component, the maximum amount of Excess Margins available for disbursement shall be equal to the total net equity.
Example 1 — Excess Margins Payments
| Customer Account | Balance |
| Total net equity | $5,000 |
| Net option value | $1,200 |
| Initial margins risk component | $3,000 |
* An Excess Margins payment can be made from the Customer Account for $3,200 {$5,000 − [($3,000 − $1,200) which = $1,800]}
Example 2 — Excess Margins Payments
| Customer Account | Balance |
| Total net equity | $-0- |
| Net option value | $9,000 |
| Initial margins risk component | $7,000 |
* As total net equity is zero, no payment can be made. {$-0- − [($7,000 − $9,000) which = 0]}. The only margin asset in the Customer Account is long option value which cannot be used to make an Excess Margins payment.
Example 3 — Excess Margins Payments
| Customer Account | Balance |
| Total net equity | $32,800 |
| Net option value | $<12,000> |
| Initial margins risk component | $14,000 |
* An Excess Margins payment can be made from the Customer Account for $6,800 {$32,800 − [($14,000 − <$12,000>) which = $26,000]}
Example 4 — Accounts owned by the same Customer
Assume client A/C A & client A/C B are owned by the same Customer.
| A/C A $ | A/C B $ | COMBINED $ | |
| Total net equity | 8,000 | 80,000 | 88,000 |
| Initial margins | 25,000 | 50,000 | 75,000 |
| Maintenance margins | 20,000 | 40,000 | 60,000 |
| Excess Margins for withdrawal | (17,000) | 30,000 | 13,000 |
If client A/C A and client A/C B are not combined, then the amount of Excess Margins that is available for withdrawal, ie $30,000, is greater than what is actually available for the Customer as a whole.
5.5 Concurrent Long and Short Positions
5.5.1 Concurrent long and short positions are long and short positions traded on the same market in the same futures or option contract for the same delivery month or expiration date and, if applicable, having the same strike price.
5.5.2 A Clearing Member may carry concurrent long and short positions as follows:
(1) all positions held by Omnibus Account holders shall be margined on a gross basis, unless otherwise exempted by the Exchange; and
(2) in a hedge account in which both the long and short positions are bona fide hedge positions, such positions shall be margined on a net basis, unless otherwise required by other regulatory bodies.
5.5.3 A Clearing Member may carry concurrent long and short hold-open positions for speculative and hedge accounts. Hold-open positions are positions offset at the Exchange but have been held open on the Clearing Member's internal bookkeeping records for the convenience of the Customer. As hold-open positions only remain open on the Clearing Member's internal records and have been offset at the Exchange, no margin is required. The Clearing Member's internal bookkeeping records shall clearly indicate all hold-open positions.
Added on 23 July 201423 July 2014 and amended on 25 January 201725 January 2017.
1 "Futures Contract" refers to any Contract, over any Underlying, designated by the Exchange as a futures contract.
2 "Option Contract" refers to any Contract which grants an option in respect of an Underlying or a Futures Contract.
3 "Excess Margins" refers to credits in excess of initial margins.
Practice Note 7.23 — Additional Margins
| Issue date | Cross Reference | Enquiries |
| Added on 8 August 20168 August 2016 | Rule 7.20 and Rule 7.23 | Please contact Risk Management: rmd@sgx.com |
1. Introduction
1.1 Rule 7.20 states that margin requirements shall be prescribed by the Clearing House from time to time, and Rule 7.23 provides for the Clearing House to call for additional margins from one or more Clearing Members in certain situations. This Practice Note elaborates on the additional margins.
1.2 The objective of additional margin requirements is to provide greater assurance that unique risks which may potentially not be captured under the Clearing House's margin setting methodology are appropriately accounted for and collateralized. As risks unique to a Clearing Member attract additional margin rather than being mutualized through the Clearing Fund, it makes Clearing Members accountable for excessive risk they bring to the system.
1.3 The Clearing House conducts daily monitoring of Clearing Members' exposures and assesses the adequacy of the Clearing House and Clearing Members' resources using a comprehensive range of scenarios. In addition, as part of its continuing risk management process, the Clearing House monitors news and developments which may affect Clearing Members, and conducts risk-based inspections on Clearing Members' risk and credit management practices.
1.4 In the event that any of the circumstances specified in Rule 7.23 exist, the Clearing House may impose additional margin requirements. Such additional margin requirements may include, without limitation:
(a) Default Fund risk add-on;
(b) Credit risk add-on;
(c) Liquidity risk add-on;
(d) Position risk add-on; and
(e) Discretionary risk add-on.
1.5 If the composition of a Clearing Member's portfolio calls for multiple add-ons, the Clearing House may at its discretion decide on an appropriate quantum sufficient to cover the risks.
1.6 For clarity, the additional margin requirements prescribed under this Practice Note do not count towards the sources of funds for the clearing fund as prescribed in Rule 7A.06 ("Clearing Fund").
1.7 Besides the add-ons described in paragraph 1.4 of this Practice Note, the Clearing House also imposes margin add-on on positions held in respect of Applicable Customer Accounts pursuant to Rule 7.30. The details are provided in Practice Note 7.30.
2. Default Fund risk add-on
2.1 The Clearing House may impose a default fund risk add-on to mitigate risk arising from a Clearing Member's stress loss when its potential tail risk exposure is significant.
2.2 The Clearing House conducts daily stress testing of Clearing Members' outstanding positions in line with the CPMI-IOSCO1 and global best practices to assess clearing fund adequacy. The test includes a comprehensive range of stressed scenarios, and clearing fund resources must be able to cover the simultaneous default of the Clearing Member and its affiliated Clearing Members with the largest aggregate loss ("Top 1"), and two other financially weakest Clearing Members ("Weak 1", "Weak 2").
2.3 While stress testing focuses on the mutualized resources to cover a default of the Top 1, Weak 1 and Weak 2, the Clearing House would also want to secure appropriate amount of resources from an individual Clearing Member with significant potential tail risk exposure. This provides a balance between mutualization and the defaulter pay principle. For guidance, the potential tail risk exposure is the worst loss estimated from different stressed scenarios, net of margins and any add-ons. The potential tail risk exposure is considered to be significant if:
(a) the potential tail risk exposure of a Clearing Member and its affiliated Clearing Members ("Member Group") exceeds a percentage (a threshold as determined by SGX) of SGX-DC Clearing Fund resources ("Threshold 1"); or
(b) the aggregate potential tail risk exposure of any Member Group, together with Weak 1 and Weak 2, exceeds a percentage (a threshold as determined by SGX) of SGX-DC Clearing Fund resources ("Threshold 2"). Threshold 2 will be higher than Threshold 12.
2.4 The Clearing House will determine the quantum of the default fund risk add-on based on the potential tail risk exposure from each Clearing Member relative to each of the two thresholds, as described below:
• In respect of Threshold 1, the applicable add-on for a Member Group is equal to the difference between its potential tail risk exposure and the threshold;
• In respect of Threshold 2, the total applicable add-on is equal to the difference between (i) the potential tail risk exposure aggregated across the Member Group, Weak 1 and Weak 2, (provided the Member Group does not include Weak 1 or Weak 2) after offsetting any add-on arising from Threshold 1, and (ii) the threshold. The applicable add-on is then allocated to the Member Group, Weak 1 and Weak 2 proportional to their exposure; and
• The add-on for a Clearing Member is equal to the sum of its applicable add-on arising from Threshold 1 and/or Threshold 2. The Clearing House may at its sole discretion not impose on Weak 1 or Weak 2 the add-on if it is not significant.
2.5 An illustration of the calculation is provided at the end of this Practice Note.
3. Credit risk add-on
3.1 The Clearing House may impose a credit risk add-on if there are concerns regarding the solvency or credit-worthiness of a Clearing Member. For guidance, these concerns may be based on indicators that include, without limitation:
(a) deterioration in the credit standing of the Clearing Member as assessed through SGX's internal credit risk rating model, downgrading of the credit rating or credit outlook of the member or its parent/affiliates by external credit agencies, widening credit default swaps of the member or its parent/affiliates;
(b) adverse market sentiments/news or any other relevant indicators on the Clearing Member or its parent/affiliate, or when the Clearing House believes the Clearing Member or its parent/affiliate may be adversely affected by unstable market conditions or price fluctuations which the Clearing House deems a concern;
(c) reduction of the Clearing Member's financial resources;
(d) in the Clearing House'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, that potentially places the Clearing House at greater risk; and
(e) 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 Member.
3.2 For guidance, the quantum of the credit risk add-on for Clearing Members will be determined by considering the following:
(a) for a Clearing Member with credit standing the Clearing House deems equivalent to B rating and below (based on the indicators described in paragraph 3.1 of this Practice Note), the quantum is equal to the difference between the member's potential tail risk exposure and a threshold. This threshold3 will be determined by SGX, as a percentage of actual SGX-DC Clearing Fund resources and will be lower than the Threshold 1 described in paragraph 2.3 of this Practice Note; and
(b) [deleted]
(c) the Clearing Member's available financial resources, prevailing market conditions and the size of Clearing Member's positions.
4. Liquidity risk add-on
4.1 The Clearing House may impose a liquidity risk add-on if there are liquidity concerns on a Clearing Member, such as not maintaining sufficient liquid resources to cover the potential funding gap for its variation margin.
4.2 The quantum of the liquidity risk add-on may be to close potential funding gap, taking into consideration any mitigating actions taken by the member. For guidance, the potential funding gap is estimated based on:
(a) its potential variation margin impact over the next clearing day for its current day portfolio (on the assumption of static portfolio), and
(b) the Clearing Member's liquid resources that is available (to offset the potential variation margin impact), which includes its excess margin collateral held with SGX-DC, and credit lines granted by its settlement banks.
4.3 [This paragraph has been deleted.]
5. Position risk add-on
5.1 The Clearing House may impose a position risk add-on if:
(a) a significant proportion of the open interest in the Contract is highly concentrated in a customer or a Clearing Member.
(b) [deleted]
5.2 The quantum of the position risk add-on should mitigate the potential slippage when liquidating a large portfolio. For guidance, before imposing position risk add-on for a Contract, the Clearing House may take into considerations the risk contribution from the Contract, and whether the concentration will be cured within a short period of time.
6. Discretionary risk add-on
6.1 The Clearing House may impose a discretionary risk add-on to a Contract or on Clearing Members with positions in a Contract to cover unique risk that may not be captured in the estimate of the Contract's potential future exposure or the conditions described in the earlier paragraphs, or to cover any types of risk arising from exceptional market conditions. The quantum of the add-on is discretionary depending on the circumstances that necessitate it. The add-on may be imposed as an absolute dollar amount, or as a percentage add-on to a Clearing Member's maintenance margin requirements, or as percentage add-on to the Contract's margin.
6.2 An example is the gap risk associated with FX-related Contracts that may arise from potential changes in currency regimes or political environment. To determine the quantum of the FX gap add-on, the Clearing House may, but not limited to, make reference to similar events in the past for relevant currency pairs.
ILLUSTRATION ON THE CALCULATION OF THE DEFAULT FUND RISK ADD-ON
ILLUSTRATION ON THE CALCULATION OF THE DEFAULT FUND RISK ADD-ON
Assumptions:
(i) Actual Clearing Fund resource is $800.
(ii) Assume SGX assigns percentages of 70% and 90% to Threshold 1 and Threshold 2 respectively.
Threshold 1: 70% x 800 = 560 (Any Member Group)
Threshold 2: 90% x 800 = 720 (Any Member Group + Weak 1 + Weak 2)
Threshold 1: 70% x 800 = 560 (Any Member Group)
Threshold 2: 90% x 800 = 720 (Any Member Group + Weak 1 + Weak 2)
Example 1 — Add-on applies to a Member Group X only
Assume only one stress testing scenario generates exposure that exceed the thresholds,
Assume only one stress testing scenario generates exposure that exceed the thresholds,
• Exposure (X + Weak 1 + Weak 2) = 700
• Exposure (X) = 640
• Exposure (Weak 1) = 60
• Exposure (Weak 2) = 0
| Loss exceeds threshold | Potential add-on | ||||
| Loss | Threshold 1 | Threshold 2 | Threshold 1 | Threshold 2 | |
| X + Weak 1 + Weak 2 | 700 | No | |||
| X | 640 | Yes | 640-560=80 | ||
| Weak 1 | 60 | No | |||
| Weak 2 | 0 | No | |||
• Therefore, credit risk add-on of 80 applies to Member Group X only.
Example 2 — Add-on applies to a Member Group X, and Weak 1 and Weak 2 by apportionment
Assume only one stress testing scenario generates exposure that exceed the thresholds,
Assume only one stress testing scenario generates exposure that exceed the thresholds,
• Exposure (X + Weak 1 + Weak 2) = 760
• Exposure (X) = 520
• Exposure (Weak 1) = 200
• Exposure (Weak 2) = 40
| Loss exceeds threshold | Potential add-on | ||||
| Loss | Threshold 1 | Threshold 2 | Threshold 1 | Threshold 2 | |
| X + Weak 1 + Weak 2 | 760 | Yes | 760-720=40 | ||
| X | 520 | No | |||
| Weak 1 | 200 | No | |||
| Weak 2 | 40 | No | |||
• Therefore, credit risk add-on of 40 applies to (X + Weak 1 + Weak 2). The add-on for each of the three members will be proportionate to their share of the aggregate exposure.
• For X, add-on = 520/(520+200+40)*40 = 28
• For Weak 1, add-on = 200/(520+200+40)*40 = 11
• For Weak 2, add-on = 40/(520+200+40)*40 = 2
Example 3 — Add-on applies to a Member Group X, and Weak 1 and Weak 2 by apportionment
Assume only one stress testing scenario generates exposure that exceed the thresholds,
Assume only one stress testing scenario generates exposure that exceed the thresholds,
• Exposure (X + Weak 1 + Weak 2) = 820
• Exposure (X) = 640
• Exposure (Weak 1) = 180
• Exposure (Weak 2) = 0
| Loss exceeds threshold | Potential add-on | ||||
| Loss | Threshold 1 | Threshold 2 | Threshold 1 | Threshold 2 | |
| X + Weak 1 + Weak 2 | 820 | Yes | 820-720=100 | ||
| X | 640 | Yes | 640-560=80 | ||
| Weak 1 | 180 | No | |||
| Weak 2 | 0 | No | |||
• Based on Threshold 1, credit risk add-on of 80 applies to the X.
• Based on Threshold 2, there is a balance of 20 since an add-on of 80 already applies to X from Threshold 1. This balance will be apportioned among X, Weak 1, and Weak 2.
• For X, add-on from Threshold 1 = 80
• For X, add-on from Threshold 2 = 560/(560+180)*20 = 15^
• For Weak 1, add-on = 180/(560+180)*20 = 5
• For Weak 2, add-on = 0
^ The loss for X is taken as 560 here because it has been partially offset by the 80 from Threshold 1. (When X exceeds Threshold 1, the calculation for its pro rata assignment under Threshold 2 will be based on Threshold 1.)
^ The loss for X is taken as 560 here because it has been partially offset by the 80 from Threshold 1. (When X exceeds Threshold 1, the calculation for its pro rata assignment under Threshold 2 will be based on Threshold 1.)
Example 4 — Add-on applies to a Member Group X, a Member Group Y, and Weak 1 and Weak 2 by apportionment
Assume a stress testing scenario generates exposure that exceed the thresholds,
Assume a stress testing scenario generates exposure that exceed the thresholds,
• Exposure (X + Weak 1 + Weak 2) = 820
• Exposure (X) = 640
• Exposure (Weak 1) = 180
• Exposure (Weak 2) = 0
Assume a second stress testing scenario generates exposure that also exceed the thresholds,
• Exposure (Y + Weak 1 + Weak 2) = 790
• Exposure (Y) = 620
• Exposure (Weak 1) = 170
• Exposure (Weak 2) = 0
| First stress scenario | |||||
| Loss exceeds threshold | Potential add-on | ||||
| Loss | Threshold 1 | Threshold 2 | Threshold 1 | Threshold 2 | |
| X + Weak 1 + Weak 2 | 820 | Yes | 820-720=100 | ||
| X | 640 | Yes | 640-560=80 | ||
| Weak 1 | 180 | No | |||
| Weak 2 | 0 | No | |||
| Second stress scenario | |||||
| Loss exceeds threshold | Potential add-on | ||||
| Loss | Threshold 1 | Threshold 2 | Threshold 1 | Threshold 2 | |
| Y + Weak 1 + Weak 2 | 790 | Yes | 790-720=70 | ||
| Y | 620 | Yes | 620-560=60 | ||
| Weak 1 | 170 | No | |||
| Weak 2 | 0 | No | |||
• Based on Threshold 1, credit risk add-on of 80 and 60 applies to X and Y respectively.
• Both scenarios have to be considered to determine the add-on arising from Threshold 2.
• For first scenario (X + Weak 1 + Weak 2), balance of 20 applies.
• For X, add-on = 560/(560+180)*20 = 15
• For Weak 1, add-on = 180/(560+180)*20 = 5
• For Weak 2, add-on = 0
• For second scenario (Y + Weak 1 + Weak 2), balance of 10 applies.
• For Y, add-on = 560/(560+170)*10 = 8
• For Weak 1, add-on = 170/(560+170)*10 = 3
• For Weak 2, add-on = 0
• Therefore the final add-on is:
• For X, add-on = 80 + 15 = 95
• For Y, add-on = 60 + 8 = 68
• For Weak 1, add-on = higher of (5, 3) = 5
• For Weak 2, add-on = 0
1 Principles for Financial Market Infrastructures issued by the Committee on Payments and Market Infrastructure (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO)
2 Threshold 1 and 2 is currently defined as 70% and 90% respectively, but may be revised from time to time.
3 The threshold is currently defined as 15%, but may be revised from time to time.
Added on 8 August 20168 August 2016 and amended on 17 July 201917 July 2019.
Practice Note 7.30 — Enhanced Customer Collateral Protection
| Issue date | Cross Reference | Enquiries |
| Added on 31 December 201331 December 2013 and amended on 17 July 201917 July 2019 | 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 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 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.
Practice Note 7A.01A.2A — Apportionment of Clearing Fund Contributions across Contract Classes and across OTCF auctions [This Practice Note has been deleted.]
Deleted on 17 July 201917 July 2019.
Practice Note 7A.01A.2B.2 — Apportionment and application of Clearing Fund Contributions when one or more auctions are held in respect of a Contract Class
| Issue Date | Cross Reference | Enquiries |
| Added on 17 July 201917 July 2019. | Clearing Rules 7A.01A.2C, 7A.01A.2D and 7A.01A.2E | Please contact: Risk Management E-Mail Address : rmd@sgx.com |
1. Introduction
1.1. This Practice Note illustrates the apportionment and application of Clearing Fund Contributions when one or more auctions are held in respect of a Contract Class. For the purposes of this Practice Note, the Contract Class specified in Rule 7A.01A.5.a, which comprises of (i) contracts that are listed for trading on the Exchange or Relevant Market and (ii) Non-Relevant Market Contracts, will be referred to as the "ETD and NMC Contract Class", the contracts collectively as "ETD and NMC Contracts", the Contract Class and an auction held in respect of this Contract Class as an "ETD and NMC Auction".
1.2 This Practice Note describes:
i. the apportionment of the Clearing House First Loss Contribution, Clearing House Intermediate Contribution, and the Clearing Fund Deposit of each Clearing Member, where one or more ETD and NMC Auctions are held pursuant to Rules 7A.01A.2C.2, 7A.01A.2D.2, and 7A.01A.2E.2; and
ii. the use of Required Participants' Clearing Fund Deposits based on their bidding behaviour in an ETD and NMC Auction, pursuant to Rule 7A.01.2D.2.
2. Apportionment of Clearing House First Loss Contribution and Clearing House Intermediate Contribution to auctions held in respect of the ETD and NMC Contract Class
2.1 For each ETD and NMC Auction, the Clearing House First Loss Contribution and Clearing House Intermediate Contribution shall be apportioned to that auction, based on the proportion of the notional value of the Auction Portfolio vis-à-vis the aggregate notional value of the defaulted Clearing Member's contracts in the ETD and NMC Contract Class.
3. Apportionment of a Required Participant's Clearing Fund Deposit to an ETD and NMC Auction
3.1 For each ETD and NMC auction, the Clearing Fund Deposit of each Required Participant shall be further apportioned to that auction based on the proportion of the notional value of the Required Participant's contracts that are the same as those in the Auction Portfolio vis-à-vis the aggregate notional value of all of that Required Participant's contracts in the ETD and NMC Contract Class.
4. Illustration of how the Clearing Fund Deposits of Required Participants who have submitted bids for an ETD and NMC auction are pro-rated pursuant to Rule 7A.01A.2D.2
4.1 This section illustrates how Required Participants' Clearing Fund Deposits are pro-rated pursuant to Rule 7A.01A.2D.2.
4.2 Pursuant to Rule 7A.01A.2D.2, where an ETD and NMC auction is held, the Clearing Fund Deposits of all Required Participants apportioned to that auction will be applied to meet losses arising from or in connection with that auction, in the following order of priority and manner, with each level to be exhausted before the next level is applied:
a. first, the apportioned Clearing Fund Deposits of Required Participants who did not participate in the auction;
b. second, the apportioned Clearing Fund Deposits of Required Participants who had submitted bids that were below the Winning Bid Price, which will be applied on a pro-rata basis based on the product of:
i. the distance between such Required Participant's bid price and the Winning Bid Price; and
ii. the apportioned Clearing Fund Deposit of such Required Participant;
c. third, the unused apportioned Clearing Fund Deposits of Required Participants who had submitted bids that were below the Winning Bid Price, that was not applied in (b);
d. fourth, the apportioned Clearing Fund Deposits of Required Participants who had submitted the Winning Bid Price.
4.3 The following example illustrates Rule 7A.01A.2D.2.b.
A and B are Required Participants who had submitted bids that were below the Winning Bid Price. Their liabilities under Rule 7A.01A.2D.2.b will be in the following proportions:
Practice Note 7A.01B — Illustrations of the Application of Clearing Member's Clearing Fund Deposit and Further Assessment Amounts in respect of OTCF Contracts [This Practice Note has been deleted.]
Deleted on 17 July 201917 July 2019.
Practice Note 7A.06.9 — Limit on Non-defaulting Clearing Members’ Liability for Multiple Events of Default
- Introduction
- Rule 7A.06.9.1 states that the aggregate amount of a non-defaulting Clearing Member’s Clearing Fund Deposit (“CFD”) and Further Assessment Amount ("FAA”) that can be applied to meet losses arising from or in connection with all events of default occurring within a period of thirty (30) calendar days shall not exceed an amount equal to three (3) times of that Clearing Member's Prescribed Contributions as at the start of that 30-day period.
- Rule 7A.06.9.2 states that where an event of default occurs, the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses arising suffered by the Clearing House arising from or in connection with that event of default is the lower of:
- an amount equal to three (3) 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 CFD and FAA 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 CFD was adjusted during the aforementioned 30-day period, an Adjusted Amount equal to three (3) times of the consequently adjusted Prescribed Contributions less the aggregate amount of the Clearing Member’s CFD and FAA 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.
In the event the Clearing Member’s CFD is adjusted multiple times during the 30-day period, a separate Adjusted Amount shall be calculated for each adjustment and the lowest Adjusted Amount shall apply for the purpose of Rule 7A.06.9.2.b.
- This Practice Note illustrates the operation of Rules 7A.06.9.1 and 7A.06.9.2. The scenarios set out are meant only to illustrate the calculation of the usage limits applicable under the Rules in various hypothetical scenarios, and are not representative of how defaults are managed by the Clearing House nor the actions that the Clearing House can and may take to maintain a fair, orderly, safe and efficient market.
- Operation of Rule 7A.06.9.1
Scenario 1
- Scenario 1: On Day 1, the non-defaulting Clearing Member’s Prescribed Contributions is $100. On Day 2, the Clearing Member’s Prescribed Contributions is increased to $200. This scenario illustrates how the aggregate amount of a non-defaulting Clearing Member’s CFD and FAA that can be applied to meet losses arising from events of default occurring within a 30-day period shall not exceed an amount equal to three (3) times of the Clearing Member’s Prescribed Contributions as at the start of the 30-day period.
- In accordance with Rule 7A.06.9.1, the aggregate amount of the Clearing Member’s CFD and FAA that can be applied to meet losses arising from or in connection with all events of default occurring within Day 1 to Day 30 shall not exceed an amount equal to three (3) times of that Clearing Member's Prescribed Contributions on Day 1. Therefore, even though the Clearing Member’s Prescribed Contributions were increased to $200 on Day 2, the aggregate amount of the Clearing Member’s CFD and FAA which can be applied to meet default losses occurring within Day 1 to Day 30 will not exceed $300 (i.e. 3 x $100).
- Operation of Rule 7A.06.9.2
- The following scenarios (Scenarios 2 to 5) illustrate how the amount of a non-defaulting Clearing Member’s CFD and FAA that can be used to meet losses is capped in the event of multiple defaults within a 30-day period.
Scenario 2
- Scenario 2: On Day 1, the non-defaulting Clearing Member’s Prescribed Contributions is $100. On Day 26, the Clearing Member’s Prescribed Contributions is reduced to $90. Subsequently, a default occurs on Day 30. This scenario illustrates the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the default that occurred on Day 30.
- Pursuant to Rule 7A.06.9.2, the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the event of default on Day 30 is the lower of:(a) an amount equal to 3 times of the Clearing Member’s Prescribed Contributions as at the start of the thirty-day period that ends on the day of the event of default (i.e. Day 1) less the aggregate amount used to meet default losses from all preceding events of default (i.e. from Day 1 up until the current event of default); or
3 x Prescribed Contributions on Day 1 = 3 x $100
= $300Aggregate amount used to meet default losses from all preceding events of default from Day 1 until the current event of default on Day 30 = $0 Amount that results under limb (a) = $300 - $0
= $300(b) where the Clearing Member’s CFD was adjusted during the 30-day period, an Adjusted Amount equal to three (3) times of the consequently adjusted Prescribed Contributions (i.e. the Prescribed Contributions on Day 26) less the aggregate amount of the Clearing Member’s CFD and FAA 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 (i.e. from Day 26 up until the current event of default).3 x adjusted Prescribed Contributions on Day 26 = 3 x $90
= $270Aggregate amount used to meet default losses from all events of default from Day 26 until the current event of default on Day 30 = $0 Adjusted Amount that results under limb (b) = $270 - $0
= $270 - Under this scenario, the amount that results under limb (b) is lower than the amount that results under limb (a). Therefore, the amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from the default that occurred on Day 30 is the amount that results under limb (b), which is $270.
Scenario 3
- Scenario 3: Continuing from Scenario 2, $90 of the Clearing Member’s CFD and FAA was used to meet losses suffered by the Clearing House arising from a default on Day 30. On Day 33, the Clearing Member’s Prescribed Contributions is increased to $95. A second default occurs on Day 35. This scenario illustrates the amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the second default that occurred on Day 35.
- Pursuant to Rule 7A.06.9.2, the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the event of default on Day 35 is the lower of:(a) an amount equal to 3 times of the Clearing Member’s Prescribed Contributions as at the start of the thirty-day period that ends on the day of the event of default (i.e. Day 35 – 29 days = Day 6) less the aggregate amount used to meet default losses from all preceding events of default (i.e. from Day 6 up until the current event of default); or
3 x Prescribed Contributions on Day 6 = 3 x $100
= $300Aggregate amount used to meet default losses from all preceding events of default from Day 6 until the current event of default on Day 35 = $90* * From the default on Day 30 Amount that results under limb (a) = $300 - $90
= $210(b) where the Clearing Member’s CFD was adjusted during the 30-day period, an Adjusted Amount equal to three (3) times of the consequently adjusted Prescribed Contributions less the aggregate amount of the Clearing Member’s CFD and FAA 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.Rule 7A.06.9.2 also states that in the event the Clearing Member’s CFD is adjusted multiple times during the 30-day period, a separate Adjusted Amount shall be calculated for each adjustment and the lowest Adjusted Amount shall apply for the purpose of Rule 7A.06.9.2.b. In this case, the Clearing Member’s CFD was adjusted twice resulting in two adjusted Prescribed Contributions within the relevant 30-day period. Therefore two separate Adjusted Amounts will be calculated. Adjusted Amount A: 3 x adjusted Prescribed Contributions on Day 26 = 3 x $90
= $270Aggregate amount used to meet default losses from all events of default from Day 26 until the current event of default on Day 35 = $90* * From the default on Day 30 Adjusted Amount A = $270 - $90
= $180Adjusted Amount B: 3 x adjusted Prescribed Contributions on Day 33 = 3 x $95
= $285Aggregate amount used to meet default losses from all events of default from Day 33 until the current event of default on Day 35 = $0 Adjusted Amount B = $285 - $0
= $285Adjusted Amount A ($180) is lower than Adjusted Amount B ($285), therefore Adjusted Amount A applies for the purpose of Rule 7A.06.9.2.b and the amount that results under limb (b) is $180. - In this scenario, the amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from the second default that occurred on Day 35 is the lowest Adjusted Amount calculated pursuant to limb (b), which is $180.
Scenario 4
- Scenario 4: Continuing from Scenario 3, $90 of the Clearing Member’s CFD and FAA was used to meet losses suffered by the Clearing House arising from the second default on Day 35. A third default occurs on Day 37. This scenario illustrates the amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the default that occurred on Day 37.
- Pursuant to Rule 7A.06.9.2, the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses arising suffered by the Clearing House arising from or in connection with the event of default on Day 37 is the lower of:(a) an amount equal to 3 times of the Clearing Member’s Prescribed Contributions as at the start of the thirty-day period that ends on the day of the event of default (i.e. Day 37 – 29 days = Day 8) less the aggregate amount used to meet default losses from all preceding events of default (i.e. from Day 8 up until the current event of default); or
3 x Prescribed Contributions on Day 8 = 3 x $100
= $300Aggregate amount used to meet default losses from all preceding events of default from Day 8 until the current event of default on Day 37 = $90* + $90**
= $180* From the default on Day 30 ** From the default on Day 35 Amount that results under limb (a) = $300 - $180
= $120(b) where the Clearing Member’s CFD was adjusted during the 30-day period, an Adjusted Amount equal to three (3) times of the consequently adjusted Prescribed Contributions less the aggregate amount of the Clearing Member’s CFD and FAA 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.Rule 7A.06.9.2 states that in the event the Clearing Member’s CFD is adjusted multiple times during the 30-day period, a separate Adjusted Amount shall be calculated for each adjustment and the lowest Adjusted Amount shall apply for the purpose of Rule 7A.06.9.2.b. In Scenario 3 from which this scenario continues, the Clearing Member’s CFD was adjusted twice resulting in two adjusted Prescribed Contributions within the relevant 30-day period. Therefore two separate Adjusted Amounts will be calculated. Adjusted Amount A: 3 x adjusted Prescribed Contributions on Day 26 = 3 x $90
= $270Aggregate amount used to meet default losses from all events of default from Day 26 until the current event of default on Day 37 = $90* + $90**
=$180* From the default on Day 30 ** From the default on Day 35 Adjusted Amount A = $270 - $180
= $90Adjusted Amount B: 3 x adjusted Prescribed Contributions on Day 33 = 3 x $95
= $285Aggregate amount used to meet default losses from all events of default from Day 26 until the current event of default on Day 37 = $90** ** From the default on Day 35 Adjusted Amount B = $285 - $90
= $195Adjusted Amount A ($90) is lower than Adjusted Amount B ($195), therefore Adjusted Amount A applies for the purpose of Rule 7A.06.9.2.b and the amount that results under limb (b) is $90. - The amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from the third default that occurred on Day 37 is the lowest Adjusted Amount calculated pursuant to limb (b), which is $90.
Scenario 5
- Scenario 5: Continuing from Scenario 4, $90 of the Clearing Member’s CFD and FAA was used to meet losses suffered by the Clearing House arising from the third default on Day 37. A fourth default occurs on Day 45. This scenario illustrates the amount of the non-defaulting Clearing Member’s CFD and FAA that is available to meet losses suffered by the Clearing House arising from or in connection with the default that occurred on Day 45.
- Pursuant to Rule 7A.06.9.2, the amount of a non-defaulting Clearing Member’s CFD and FAA that is available to meet losses arising suffered by the Clearing House arising from or in connection with the event of default on Day 45 is the lower of:(a) an amount equal to 3 times of the Clearing Member’s Prescribed Contributions as at the start of the thirty-day period that ends on the day of the event of default (i.e. Day 45 – 29 days = Day 16) less the aggregate amount used to meet default losses from all preceding events of default (i.e. from Day 16 up until the current event of default); or
3 x Prescribed Contributions on Day 16 = 3 x $100
= $300Aggregate amount used to meet default losses from all preceding events of default from Day 16 until the current event of default on Day 45 = $90* + $90** + $90^
= $270* From the default on Day 30 ** From the default on Day 35 ^ From the default on Day 37 Amount that results under limb (a) = $300 - $270
= $30(b) where the Clearing Member’s CFD was adjusted during the 30-day period, an Adjusted Amount equal to three (3) times of the consequently adjusted Prescribed Contributions less the aggregate amount of the Clearing Member’s CFD and FAA 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.Rule 7A.06.9.2 states that in the event the Clearing Member’s CFD is adjusted multiple times during the 30-day period, a separate Adjusted Amount shall be calculated for each adjustment and the lowest Adjusted Amount shall apply for the purpose of Rule 7A.06.9.2.b. In Scenario 3 from which this scenario continues, the Clearing Member’s CFD had been adjusted twice resulting in two adjusted Prescribed Contributions within the relevant 30-day period. Therefore, two separate Adjusted Amounts will be calculated. Adjusted Amount A: 3 x adjusted Prescribed Contributions on Day 26 = 3 x $90
= $270Aggregate amount used to meet default losses from all events of default from Day 26 until the current event of default on Day 45 = $90* + $90** + $90^
= $270* From the default on Day 30 ** From the default on Day 35 ^ From the default on Day 37 Adjusted Amount A = $270 - $270
= $0Adjusted Amount B: 3 x adjusted Prescribed Contributions on Day 33 = 3 x $95
= $285Aggregate amount used to meet default losses from all events of default from Day 33 until the current event of default on Day 45 = $90** + $90^
= $180** From the default on Day 35 ^ From the default on Day 37 Adjusted Amount B = $285 - $180
= $105Adjusted Amount A ($0) is lower than Adjusted Amount B ($105), therefore Adjusted Amount A applies for the purpose of Rule 7A.06.9.2.b and the amount that results under limb (b) is $0. - In this case, the non-defaulting Clearing Member’s CFD and FAA cannot be used to meet losses suffered by the Clearing House arising from the fourth default that occurred on Day 45 as the lowest Adjusted Amount calculated pursuant to limb (b) is $0.
Added on 31 October 2024.
Practice Note 9.01.1 — OTCF Product Groups [This Practice Note has been deleted.]
Deleted on 17 July 201917 July 2019.