SGX 'ahead of the curve' on CCP capital, argues director

Singapore Exchange puts up 25% of the capital in its default waterfall, while European and US CCPs contribute 2.6% on average

SGX aims to be the 'flight to quality jurisdiction of choice' in Asia

Jane Diplock, an independent director of the Singapore Exchange (SGX), has lauded the venue for putting more capital at risk than other leading clearing houses, claiming the commitment means the firm is "ahead of the curve".

SGX has committed to put up at least 25% of the capital in its default waterfall, while the Monetary Authority of Singapore requires a CCP to contribute capital equal to 25% of the aggregate guaranty fund. Meanwhile, the European Market Infrastructures Regulation (Emir) requires European central counterparties (CCPs) to put 25% of their regulatory minimum capital at risk – potentially a much smaller amount – while US clearing houses can decide for themselves how much capital they contribute to their default waterfalls.

Diplock's comments come amid a fierce debate about how much protection – so-called 'skin in the game' – a CCP should provide to absorb losses from a default before they are parcelled out to member firms. Banks argue CCPs should stump up more capital in order to align their interests with members; clearing houses claim interests are already aligned.

Speaking at the annual Asia Risk Congress in Singapore on September 9, Diplock said SGX's policy results in "by far the highest skin in the game", and compared it to an average capital-to-default-fund ratio of 2.6% among leading US and European clearing houses. The 2.6% figure appeared first in analysis published in Risk by Citi.

Diplock noted that SGX's capital contribution is also risk-based.

Unlike US and European clearing houses, the SGX contribution continues to scale higher as CCP usage continues

"Unlike US and European clearing houses, the SGX contribution continues to scale higher as CCP usage continues," she said. "SGX has stayed ahead of the curve through its commitment to scaling capital support to its business in order to meet the best risk practices. This commitment to resiliency is a statement of confidence in Singapore's relevance to growth and continued liberalism in Asean, India and China. I share this confidence."

Under the default waterfall model being implemented in Europe and elsewhere, the capital the CCP puts aside will be used in the event of a default before the capital of non-defaulting members is touched. Under the European Market Infrastructure Regulation, a CCP is required to put at least 25% of its total capital at risk in its default waterfall. In practice, according to Citi's analysis, skin in the game numbers range from $150 million at CME's rates clearing service to $50.66 million at LCH.Clearnet's SwapClear service. The former has a ratio of 6.07%, while the latter sits at 1.27%.

Citi argues a rates CCP should have a ratio of 8.1%, based on expected shortfall calculations of the amount of tail risk these services face.

SGX recently increased its contribution to the CCP's guarantee fund by another S$50 million ($35 million) to reach a total contribution of S$200 million, according to Diplock.

"The relevance of Singapore's capital market infrastructure in Asian risk management will increase," predicts Diplock. "The policy decisions of regulatory implementation necessary to achieve this will be difficult to duplicate elsewhere in Asia. Whilst there are free trade zones in India and China, only Singapore has transformed itself into a multi-market jurisdiction with SGX, Eurex and Ice as fully fledged derivative exchanges. The capacity of Singapore market infrastructure ensures it remains the flight-to-quality jurisdiction of choice whenever stresses appear in the Asian or global financial network."