SGX Observes New Global Regulatory, Risk Management And Capital Standards
Singapore Exchange (SGX) today said it is well positioned to meet the latest international regulatory and risk management standards set by the International Organisation of Securities Commissions (IOSCO) and Committee on Payment and Settlement Systems (CPSS). This has been achieved after an extensive review and sharpening of SGX’s risk management and operational processes, and the addition of new rules and procedures to enhance the safety and efficiency of its subsidiaries.
“Recognising our robust regulatory framework and financial strength, customers have increased the use of SGX’s clearing services to manage their market exposures. In meeting the latest global regulatory requirements, we assure our customers that they can continue to efficiently expand their businesses and confidently manage their risks via SGX. Our standing as the clearing house and exchange of choice in Asia is further validated and made more secure,” said Mr Magnus Bocker, CEO of SGX.
Over the past two years, IOSCO, the standard setting body of securities regulators, has issued new standards on trading and clearing with the objectives of protecting investors, ensuring that markets are fair, efficient and transparent, and reducing systemic risk. Together, CPSS and IOSCO also published the Principles for Financial Market Infrastructures (PFMI) in April 2012, which established the global regulatory standards for clearing, payment and settlement.
SGX, which operates in line with current IOSCO standards, will by January 2013, observe all the new CPSS-IOSCO PFMI Principles. SGX will be among the earliest exchanges and clearing houses globally to meet these standards. Improvements effected will include:
SGX has two clearing houses, namely, Singapore Exchange Derivatives Clearing Limited (SGX-DC) that clears derivatives transactions and the Central Depository Pte Limited (CDP) that clears securities transactions. Both clearing houses have ample capital to meet their obligations as Central Counterparties (CCPs). SGX has also internally deployed more capital to support their clearing activities.
- SGX-DC has net equity capital of S$246 million, of which S$150 million is contributed to its Clearing Fund. With this capital in place, SGX-DC is in a position to serve more over-the-counter (OTC) market participants seeking to use clearing services, or other products, to mitigate risks and meet new regulatory requirements.
- The CDP, which clears securities transactions, has net equity capital of S$179 million of which S$60 million is contributed to its Clearing Fund.
SGX’s two clearing houses will also seek stand-alone recognition from regulators in several countries to support on-going and future activities.
In addition to capital adequacy, SGX will introduce securities margining in the CDP effective 21 January 2013. This will strengthen the CDP’s capacity to clear more products including single stock options, fixed income securities and multi-currency securities. Such robust margining practice is already in place in SGX-DC.
Increased Transparency and Market Enhancements
- Transparency of SGX Clearing Houses
In line with the new standards, SGX will provide increased transparency on matters relating to its risk management processes and systems to enable participants to gain a greater understanding of their respective risk exposures to the clearing houses.
SGX will also provide more information on its trading and clearing fees to enable end-customers to understand better the cost of using trading and clearing services.
- Transparency of Market Activities
To further enhance transparency of market activities, SGX will from March 2013 enable tagging of securities orders which involve short selling. Daily reports on the total value and volume of short sales for each counter will be published. The tagging of short sell orders and disclosure of short selling information will enable investors to make better-informed investment decisions.
- Market Enhancements
Over the past year, SGX has introduced various enhancements in both the securities and derivatives markets. SGX will also introduce mandatory pre-trade risk controls for derivatives at the Exchange-level in the coming months. This initiative will enable more effective risk management by SGX members.
Recognition by U.S. and European regulators to provide for global participants
SGX is seeking formal recognition from the U.S. Commodity Futures Trading Commission (CFTC) for both its derivatives exchange (SGX-DT) and clearing house (SGX-DC) to maintain continuity in its global derivatives activities. It will also be seeking recognition from the European Securities and Markets Authority (ESMA) in due course.
SGX-DC’s application to be registered as a Derivatives Clearing Organisation (DCO) in the U.S. is in progress and on course. In the meantime, CFTC has granted SGX specific no-action relief to enable U.S. customers to continue their current OTC clearing activities via SGX-DC till such time when the registration is complete.
SGX as Asia’s Pioneering Central Counterparty and Gateway
SGX’s attractiveness as a centre for risk management is well-supported by its strong capital base and its anchor in Singapore’s AAA strength and financial stability.
As Asia’s pioneering Central Counterparty, SGX was the first to offer clearing of Interest Rate Swaps (IRS) and Asian Foreign Exchange Forwards (NDF) in Asia. In the futures market, overnight open market positions, or open interest, on SGX hit a new record high of 2.95 million contracts on 13 December 2012. This is 250% higher than the open interest a year earlier. In commodities, SGX cleared more than 100 million tonnes of iron ore swaps in 2012. Over 90% of the world’s cleared iron ore swaps are cleared at SGX.
 The IOSCO Objectives were announced in June 2010. Please refer to this link for more details: http://www.iosco.org/news/pdf/IOSCONEWS188.pdf
 CPSS-IOSCO Principles for Financial Market Infrastructures http://www.bis.org/publ/cpss101a.pdf
 The new standards (called "principles") replace the three existing sets of international standards set out in the Core principles for systemically important payment systems (CPSS, 2001); the Recommendations for securities settlement systems (CPSS-IOSCO, 2001); and the Recommendations for central counterparties (CPSS-IOSCO, 2004). CPSS and IOSCO have strengthened and harmonised these three sets of standards by raising minimum requirements, providing more detailed guidance and broadening the scope of the standards to cover new risk-management areas and new types of FMIs.