In July 2012, the Singapore Exchange (SGX) announced plans to strengthen its default management framework to protect its derivatives market from systemically destabilising events, such as the possibility of multiple member defaults. The relevant amendments to the SGX-Derivatives Clearing (SGX-DC) Rules took effect on 7 August 2012.

The SGX’s move to make it mandatory for all over-the-counter derivatives to be cleared through a central counterparty (CCP) by early 2013 concentrates more risks in CCPs, and increased participation of global institutions in CCP clearing raises the risk of contagion effects arising from the interconnectedness of financial markets. The SGX has enhanced the default management framework in anticipation of an expansion in the scope of its clearing business and to address the needs of its members.

Some of these enhancements include:

  • Establishing the clearing member’s liabilities in circumstances of multiple defaults (i.e. where several defaults happen in quick succession) if the clearing member resigns;
  • Allowing the SGX-DC to apply the clearing fund continually to meet the losses arising from all defaults which occur within a fixed period of 90 days; and
  • Clarifying and refining the SGX-DC’s powers in managing a default, including clarification on the SGX-DC’s authority to transfer and manage customer positions and margins from the defaulting clearing member to a non-defaulting clearing member.