ICE Clear Singapore has established a Risk Committee, comprised of representatives of the Clearing House, Members and other participants. The Risk Committee is mandated, amongst other things, to make recommendations to the Board with respect to membership requirements, margin parameter settings and sensitivity analysis, default management procedures, analysis of guaranty fund requirements, collateral management, approved financial institution risk reviews, liquidity analysis, and stress scenarios.
ICE Clear Singapore has a series of comprehensive controls and protections in place to respond to an extensive range of extreme but plausible stress events and default scenarios.
- Membership criteria and creditworthiness
The first level of protection are the Clearing House’s conservative membership standards. These include assessing and monitoring each clearing member’s credit worthiness.
- Original Margin
The second level of protection is the appropriate collateralization of market risk through original margin. It is calibrated to be sufficient to cover the expected cost of closing out a defaulting Member’s position in normal market conditions to a 99% confidence interval. Members may be required to provide additional margin to cover concentration risk, illiquid positions or wrong way risk.
- Collateral and liquidity management
ICE Clear Singapore requires clearing members to collateralise their credit exposure by depositing highly liquid collateral with the Clearing House that has low credit, liquidity and market risk. Conservative haircuts are applied to collateral in order to manage market risk. Cash is secured through investment policies which are designed to safeguard the principal (safety), provide sufficient liquidity to meet all operational requirements (liquidity) and obtain a reasonable rate of return (yield) whilst complying with relevant laws and regulations. ICE Clear Singapore regularly stress tests liquidity needs in order to ensure that adequate resources are in place.
- Customer Segregation and Portability
Importantly, customer-related margin is segregated from the clearing member’s house (proprietary) margin. The purpose of such segregation is to ensure that in no event will customer-related margin be exposed to losses associated with the clearing member’s proprietary trading. In addition, the segregation of customer-related margin serves to facilitate the transfer (porting) of customer-related positions in the event that the clearing member defaults to the Clearing House.
- Daily Mark-to-Market / Variation Margin
Further protection is provided through the revaluation of cleared portfolios, on at least a daily basis, through settlement of variation margin. This practice of requiring clearing members to pay their losses on at least a daily basis serves to avoid the accumulation of large losses over time. Clearing members with losing positions are held accountable as the market moves.
- Intraday Risk Monitoring
ICE Clear Singapore monitors positions on a nearly real-time basis and may make additional intra-day margin calls in the event that certain risk thresholds are exceeded. Clearing members are required to provide additional collateral in a timely and proscribed manner in the event of an intraday call.
- Guaranty Fund and ICE Contribution
ICE Clear Singapore has established a mutualised guaranty fund to be used in the event of a clearing member default and the margin held in respect of that member proving to be insufficient to cover the subsequent cost of liquidating their position. The size of the guaranty fund is determined on the basis that the combination of the defaulters’ margin and the total guaranty fund are sufficient to withstand the simultaneous default of at least the clearing member (and its affiliates) to which the Clearing House has the largest exposure plus the two financially weakest clearing members, under stress conditions representing extreme but plausible scenarios. The Clearing House contributes a total of 25% of the guaranty fund, comprising of two layers of (i) 15% upfront and (ii) 10% applying immediately after the clearing members’ contributions. Clearing members’ guaranty fund contributions are calculated on the basis of their relative exposure to the Clearing House.
- Powers of Assessment
As part of the default waterfall, ICE Clear Singapore has a contractual right to call for additional guaranty fund contributions from clearing members in the form of assessment rights. Assessment rights are limited to two times the clearing member’s guaranty fund requirement per default.
In the event of a clearing member default, the primary responsibility of the Clearing House is to contain the cost of closing out the Defaulter’s position to an amount less than the margin and guaranty fund contribution of the Defaulter. This protects both the non-defaulting Members and the Clearing House from losses and by extension the markets that the clearing house provides clearing services to.
ICE Clear Singapore has extensive powers under the Clearing Rules (Part 9: Default Rules) that allow it to perform this function. This includes details on events that could constitute an Event of Default.
In managing the default losses the Clearing House may decide to use one or more default auctions. An example of how these auction procedures could work can be found here.
The Clearing House will, on a best endeavours basis and where it is able to identify individual client positions and it does not compromise its duty to contain the Defaulter’s losses, assist clients of the Defaulter in the transfer of their positions to an alternative Member. Please note that, under the existing client account structure and relevant laws and regulations, individual clients margin monies cannot be ported at the same time as positions.