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The Singapore Exchange is set to require traders to put up funds at its clearing house to reflect the daily risks of share dealing and minimise the fallout from a catastrophic trading failure.
The move is a sign that exchanges in Asia are responding to pressure from global watchdogs to improve their ability to monitor risks taken by their members in the wake of the 2008 financial crisis.
Clearing houses have become a focus of improving risk management in the financial system, especially amid the growth of rapid-fire share trading where regulators fear traders could take on excessive risks in the blink of an eye.
A clearing house stands between two parties to a trade, guaranteeing that the deal is completed if one side defaults.
It uses funds known as collateral, or margin, posted by its members to help bail out defaulters and may also draw on further money in a “default fund”, to which the clearing house and its members contribute.
In April, the International Organisation of Securities Commissions, the umbrella group for the world’s markets watchdogs, issued new standards for clearing houses requiring them to “ensure that the infrastructure supporting global financial markets is robust and thus well placed to withstand financial shocks”.
SGX said that, from January, it proposed requiring its members trading shares to post “maintenance margin”, which would reflect “potential future exposure”.
It would also require the posting of “variation margin”, which covers so-called mark-to-market losses.
Currently brokers and others trading shares on the exchange only put up regular contributions to the default fund that are reviewed monthly. That contribution is calculated on the total value of their trades in the past 12 months.
Agnes Siew, head of clearing risk at SGX, said this would allow for more “real time” monitoring of risks.
“When someone comes into a clearing house or trading system they need to know what they’re in for and how they are protected,” she said. “This is what these standards are all about so we want to reinforce our position as a safe and efficient clearing infrastructure.”
The move comes as similar measures are under way at Hong Kong Exchanges & Clearing, which has been overhauling its clearing systems after admitting a year ago that its risk management was not up to international standards.
Under a plan unveiled in March, it is set to introduce by year-end “volatility-based” margining, which will enable the exchange to get a better grip on risks taken by members amid market volatility.
It will also introduce a “dynamic” default fund, an extra pot of money to be used “as a second line of support against potential excess losses in extreme but plausible situations”.