Exchange of the Year – SGX

Asia Risk Awards winner 2012: SGX – Exchange of the Year

Michael Syn, SGX

MF Global's bankruptcy was one of the largest corporate insolvencies in US history - a financial meltdown that was on an even bigger scale than the failure of corporate titans likes Chrysler and Delta Air Lines. But for the Singapore Exchange (SGX), clearing up the mess left by the broker-dealer's collapse on October 31 last year was - relatively - straightforward, according to Laurent Poirot, managing director of global markets at Bank of America Merrill Lynch in Hong Kong.

"Considering the scale of the event, the management of the risk sitting on the exchange's books while the clients defaulted was done smoothly," he says.

Winding up MF Global Singapore (MFGS) operations after its US parent declared bankruptcy meant returning over S$400 million ($309 million) of client funds held by SGX. But by November 3, SGX had suspended MFGS's membership and transferred almost all open positions and customer margins to alternate clearing members.

According to Poirot, unwinding the positions could have happened in a "fairly disruptive manner", whereas SGX managed the process seamlessly.

"SGX liquidated their positions gradually over time instead of trying to get out of it at any price. This was possible because of its ability to price the position at any point in time to determine a fair mark-to-market value of the risk they were carrying," he says.

According to Agnes Siew, head of clearing risk at SGX, the reason this process went well was simple: the exchange was well prepared. "We know our processes well so we were able to identify which portfolios had to be liquidated or transferred. This has given confidence to the markets that we can handle a crisis well," she says.

Michael Syn, head of derivatives at SGX, believes the exchange's ability to handle the crisis was enhanced by the regulatory framework in Singapore that requires client money to be kept under the higher protection of a trust. "The regulation that the Monetary Authority of Singapore (MAS) put MFGS under ensured that client money was inherently ring-fenced and safe. So we had our clients up and running and ported within a very short time," he says.

Syn also attributes the local regulatory climate for SGX's leading role in the Asian central clearing sector. In October 2010 SGX became the first Asian exchange to offer central clearing of interest rate swaps and followed this by clearing forex forwards in November last year - in each case this was without a direct mandate from the MAS.

By contrast the Hong Kong Exchange will not establish a clearing house until late 2012 -although voluntary clearing through another recognised clearing house is supported through an interim measure - while Australian Securities Exchange (ASX) intends to finalise plans for clearing of over-the-counter interest rate derivatives contingent on regulation and launch the service by mid-2013.

SGX has positioned itself as a desirable counterparty for offshore investors through its well-capitalised clearing funds, made up of clearing member and exchange contributions for use in the event of a client or member default which the exchange is unable to cover with margin funds. According to Syn, the exchange has enough free cash flow to support any increase in clearing house risk.

"As a counterparty there is a large degree of confidence that if there were any flight to quality caused by all global exposures collectively moving to SGX, we will be able to handle that, more than any other exchange in the world," he says.

SGX has set aside S$30 million in shareholder funds for its securities clearing fund and has proposed to contribute about 25% to its derivatives clearing fund. Syn claims the exchange remains open to capitalising further if need be. "We are very happy to over-capitalise. We see that it makes a great deal of sense for our business that if we have a dollar to invest we would rather put it in the clearing house than anywhere else," he says.

SGX has higher level of clearing fund contributions than other exchanges in the region. The Clearing Corporation of India Limited (CCIL), for example, does not contribute to the default or clearing funds while ASX does not have a set proportion to contribute to any of its clearing or default funds.