Published June 23, 2009

Look at risk systems too, SGX

By JAMIE LEE

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A GROUP of children was playing on the see-saw one sunny afternoon when it suddenly broke. Whose fault was it - the pudgy boy who sat still on the left side or the skinny boy who jumped violently on the right?

Because the stocky boy may not have broken the see-saw, Singapore Exchange (SGX) should also consider whether it is fair to ask bigger players to be responsible for putting more money in the Central Depository (CDP) clearing fund.

Under the proposed changes unveiled by SGX last week to revise its CDP clearing fund structure, each of its securities clearing members need to contribute at least $1 million in cash - four times the minimum amount now - to the clearing fund. The clearing fund is used, in the event of a default, to meet clearing obligations.

Bigger clearing members would foot a larger part of the bill, as they would be asked to pay a percentage of their trading turnover.

This would bring the total contribution from CDP's 24 clearing members to $30 million, twice the current figure of $15 million, with an eventual increase to $40 million later.

This move appears to follow regional practices, though the charges range quite widely. In India and Vietnam, brokerages are charged at 0.1 per cent of their trading turnover, or at least about $30,000 and $10,000 respectively. In Taiwan, brokerages with a single branch are already charged more than $1 million.

One response from DBS Vickers Securities on the proposed changes stood out. A spokesperson told BT that the second-largest brokerage in Singapore supports this move because it helps to boost risk management. In other words, basing fund contribution on turnover is fine in principle. But the spokesperson also highlighted that SGX should differentiate clearing members as well based on the soundness of their risk management systems.

'This will encourage clearing members to adopt sound risk management systems and have the desired effect of reducing risks not only to SGX and the clearing system but also all responsible participants,' the spokesperson said.

Rightly so. Turnover is a criterion, but one shouldn't just conclude that a bigger player should take on a larger chunk of the responsibility just because it earns more money.

If a member has been a responsible player in the marketplace and has implemented good risk management systems, it would be simplistic and unfair to ask it to pay more based on just turnover.

Of course, the collapse of Lehman Brothers showed that when the heavyweights fall, they fall hard and there need to be enough safeguards against this possibility.

But the bigger factor leading to Lehman's bankruptcy was not its size, but its poor risk management.

Besides, if smaller players are errant in their ways, it would be unfair to have the big boys subsidise their inadequacies.

As market participants, clearing members must of course take some responsibility, if not to the bourse, then to the investors, particularly to the retail players who are often deemed as the most vulnerable in the event of a default.

In fact, CDP - the counter-party for every trade matched on SGX's securities trading platform and the largest single contributor to the clearing fund - will itself raise its first-layer cash contribution to $30 million from $25 million under the proposed changes, a move which will lower the possibility that non-defaulting clearing members' contributions are used if a default occurs.

But SGX should also look into each clearing member's risk management structures - big or small - and try to factor this in as a determinant of contribution to the CDP fund.

This is to avoid blaming the pudgy boy and missing the skinny boy hiding behind.