The Asian 

 

 

 

 

 

 

 

 

OTC Clearing 

For Oil, Commodity, Freight & 

Financial Derivatives 

 

 

 

 

 

 

 

 
1 - 1 -

 

The information presented in this document is of a confidential nature, for 

restricted circulation only. 

 

While care has been taken to ensure the accuracy of the information in this 

document, SGX and its affiliates make no warranty as to the accuracy, 

completeness, merchantability or fitness for any purpose, of the information 

contained in this document or as to the results obtained by any person from the 

use of any information or investment product mentioned in this document. SGX 

reserves the right to make changes to such information from time to time. Any 

change, omission or error in such information, shall not form the basis for any 

claim, demand or cause of action against SGX or any of its affiliates and SGX and 

its affiliates expressly disclaim liability for the same.

 
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BACKGROUND TO SGX 

SGX, Asia-Pacific’s first demutualised integrated securities and derivatives 

exchange, is a public-listed company since November 2000. 

Established from the merger of the Stock Exchange of Singapore (SES) and the 

Singapore International Monetary Exchange (SIMEX), SGX has many years of 

clearing experience in securities and derivatives. Its trading and clearing activities 

are regulated by the Monetary Authority of Singapore (MAS).

SINGAPORE EXCHANGE DERIVATIVES CLEARING (SGX-DC) 

SGX-DC, a subsidiary of SGX, is a regulated clearing house with over 20 years of 

proven derivatives clearing experience. 

From its beginnings as a clearing house for exchange-traded interest rate 

derivatives, SGX-DC has expanded to clear Asian benchmark exchange-traded 

equity index futures and options, and OTC commodities, freight, oil, foreign 

exchange and interest rate derivatives under SGX AsiaClear.

SGX-DC pioneered the Mutual Offset System (MOS) in 1984 with one of the largest 

exchange and clearing house in US, the most successful interoperability model 

between exchanges and clearing houses in recent times.
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OIL, COMMODITIES and FREIGHT 
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OIL, COMMODITIES and FREIGHT 

 
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OIL, COMMODITIES and FREIGHT 

 

 

 
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OIL, COMMODITIES and FREIGHT 

 
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OTC TRADED FINANCIAL DERIVATIVES 

SGX-DC offers the clearing of OTC Interest Rate Swaps (IRS) and Asian FX Forwards1

as it is currently traded in the OTC market.

As demand evolves, the offering would eventually include IRS in other currencies, 

Non-deliverable Swaps (NDS), Asian Credit Default Swaps (CDS) Indices and Asian 

single-name CDSs.

Our product focus, membership and strategic partnerships will develop over time 

as follows.

 

 

1

The clearing of FX Forwards will be launched in the second quarter of 2011.

IRD: SGD, G3 IRS

FX: Asian NDFs

IRD: Asian IRS, 

NDS

FX: FX Options

CDS:Asian Indices, 

Single Names

Critical mass

from initial

membership

Local and 

Global Banks

Regional / 

Global 

Membership

Expanded

Membership

Regional / other 

Global Banks

Product Focus

Regional / 

Global 

Membership

Strategic 

Partnerships

Standalone Platform

Linkages with 

other CCPs:

To expand 

products & 

geographies

Mutual offsets:

To minimize 

margin 

fragmentation

IRD: SGD, G3 IRS

FX: Asian NDFs

IRD: Asian IRS, 

NDS

FX: FX Options

CDS:Asian Indices, 

Single Names

Critical mass

from initial

membership

Local and 

Global Banks

Regional / 

Global 

Membership

Expanded

Membership

Regional / other 

Global Banks

Product Focus

Regional / 

Global 

Membership

Strategic 

Partnerships

Standalone Platform

Linkages with 

other CCPs:

To expand 

products & 

geographies

Mutual offsets:

To minimize 

margin 

fragmentation
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OTC TRADED FINANCIAL DERIVATIVES 

MEMBERSHIP 

 

The membership comprise local, global and Asian domiciled banks as Bank 

Clearing Members (“BCMs”).

The list of current clearing members includes:

1. Barclays Bank PLC, 

2. Citibank N.A., 

3. Credit Suisse AG, 

4. DBS Bank Limited, 

5. Deutsche Bank AG, 

6. The Hongkong and Shanghai anking Corporation Limited, 

7. Oversea-Chinese Banking Corporation Limited, 

8. The Royal Bank of Scotland plc, 

9. Standard Chartered Bank and 

10.United Overseas Bank Limited.

CLEARING RIGHTS 

Clearing Members would be able to clear proprietary IRS and FX Forwards positions 

at launch. 

As demand evolves, the clearing rights of the clearing membership would include 

clearing for customer positions.
9 - 9 -

OTC TRADED FINANCIAL DERIVATIVES 

MEMBERSHIP CRITERIA 

Market participants that meet the following requirements can apply for SGX 

membership:

Membership 

Category 

Bank Clearing Members (“BCM”) 

(Singapore Licensed Banks) 

 

Participation IRS & FX Forwards Clearing

License 

Requirements 

Authorised to conduct banking business in Singapore pursuant to 

Section 4 of the Banking Act (Chapter 19)

Banks licensed to operate in Singapore are exempted from CMS 

license from MAS

Minimum Financial 

Requirements 

Holding company must have group shareholders’ funds of at least 

S$1 billion

Minimum clearing 

fund contribution 

US$10M for IRS & FX Forwards participation

Credit/Financial 

Strength Rating2 

 

Member or its parent has a Long Term Credit Rating of at least A and 

a Financial Strength Rating of at least C

Other ongoing 

requirements 

 

Please refer to SGX-DC Rules.

 

2 Moody’s Investors Service, Standard & Poor’s Corporation, Fitch, or any equivalent international rating agency 

deemed acceptable by the Clearing House.
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Trade Registration

Platform

Broker

Dealer B Dealer A

Trade 

Confirmation

Notional=...

Rate=...

...

API

Send for 

Clearing

Send for 

Clearing

Clearing

House

Clearing

House Members

OTC TRADED FINANCIAL DERIVATIVES 

CLEARING PROCESS 

The high level operational flow below illustrates how a typical OTC trade between 2 

counterparties would be sent to SGX DC for clearing.

Trade Execution

An OTC trade is executed, either direct or via an 

inter-dealer broker(IDB).

The trade is fed to trade registration platforms 

(e.g. MarkitWire for IRS, Thomson Reuters for FX 

Forwards) for electronic confirmation by the 

dealers or IDBs.

Trade Registration & Confirmation 

The dealers confirm the trade details on the 

respective trade registration platform and 

indicate to send this trade for clearing.

The trade registration platform would perform 

an eligible check on the contract specifications 

and the members before submitting to the 

clearing house.

 

Daily Margining & Novation 

The Clearing House receives trade details of the 

trades submitted for clearing via the trade 

registration platforms.

Subject to collateral availability, the trade 

would be novated to the Clearing House

The clearing status (i.e. cleared / pending) is 

communicated to the members after Clearing 

House accepts the trade

Post Trade Life Cycle Processing 

The Clearing House would provide daily pricing 

data, resets, and reports on positions, margins, 

collateral and payments to members.
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Initial Trade

•Trade is agreed OTC between 

Customer C and Dealer A, who is a 

SGX clearing member.

Trade Give-up

•Trade is given up to Clearing Member 

B, who is C’s Prime Broker.

Trade Cleared

•Trade between B (client position) and 

A (house position) is cleared by the 

clearing house

•A and B can be the same entity but 

the customer and house margins are 

segregated.

Clearing

House

Customer C Dealer A

Clearing 

Member B

OTC TRADED FINANCIAL DERIVATIVES

CLEARING SERVICES FOR THIRD-PARTY CLIENTS 

As demand evolves, clearing members will have the ability to clear customer 

positions in IRS and FX Forwards. Existing SGX Derivatives Clearing Members will 

be able to clear FX Forwards on behalf of their customers. 

Customers who do not meet the membership criteria may establish client 

relationships with clearing members

House and Customer margins are required to be segregated. No offsets are 

allowed for house and customer positions belonging to the same clearing member. 

SGX DC will look to the clearing member for the collection of customer margins.
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OTC TRADED FINANCIAL DERIVATIVES

GLOBAL INTEROPERABILITY 

The global landscape for CCP clearing for OTC derivatives is evolving, with multiple 

clearing houses focusing on differing geographies and asset classes. No single 

dominant clearing house has emerged across geographies or asset classes.

Financial institutions operating across geographies and in multiple asset classes,

are keen to avoid margin fragmentation from clearing with different CCPs.

SGX will actively explore linkages with other clearinghouses to develop clearing 

arrangements for the benefit of our membership.

These arrangements would allow members to trade across geographies and hold 

collateral at a single CCP of their choice. 

This will help avoid margin fragmentation and ensure cost effective clearing 

capabilities.
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Default Management 

•Utilisation priority of default fund 

•Robust default management processes

Membership Supervision

•Ongoing supervision by SGX to monitor

financial adequacy of members

Regulatory Oversight 

•SGX DC – Clearing House regulated by the

Monetary Authority of Singapore (MAS) 

OTHER SAFEGUARDS

Adequate and Scalable Default fund

•Single default fund for all derivatives ensures capital efficiency

•Daily stress testing to ensure adequacy

•Scalable structure in proportion to members’ exposure

Mark-to-Market/Settlement Variation

•Transparent valuation methodology 

•Fixings/Curves published daily

•Daily Mark-to-market

•Intra-day VM calls

Maintenance Margin Requirement

•Value-at-Risk (VAR) methodology, Portfolio Approach 

•Net Margining across multiple accounts with same legal entity

•Differentiation based on member long term credit rating

FINANCIAL SAFEGUARDS

SGX SAFEGUARDS 

A robust risk management framework for OTC Traded 

Financial Derivatives

 

 

 
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SGX SAFEGUARDS 

MARGINING 

Margins represent good faith deposits from clearing members and their customers 

to ensure the performance of the obligations associated with the OTC traded

positions.

 

MAINTENANCE MARGIN (MM) 

Maintenance Margin ensures the adequate collaterisation of potential clearing 

member portfolio loss under normal market movements based on historical 

simulation.

Value-at-Risk (VaR) is used for calculating MM. VaR looks at the portfolio as a 

whole and calculates the portfolio risk using the historical volatility of each 

position as a basis. Maintenance margin will be set on a single-asset portfolio 

basis e.g. an MM is calculated on a portfolio of SGD IRS, and will be based on 

prevailing market conditions and expected liquidation period. Net margining will 

be applied for multiple accounts with the same legal entity.

The acceptable collateral for MM would be cash and/or Singapore Government 

Securities, limited to on-the-run securities.

Margins would be differentiated based on Members’ financial standing through 

Margin Multipliers. Portfolio concentration multipliers and product specific risk 

multipiers may be imposed on the MM.

 

MARK-TO-MARKET (MTM) AND SETTLEMENT VARIATION (SV) 

IRS positions will be marked-to-market using SGX’s zero-coupon yield curve, which 

will be published to Clearing Members. FX Forward positions will be marked-tomarket based on forward points which will be published to Clearing Members. 

The settlement variation requirement would be the summation of the daily change 

in valuation for each trade for the CM’s house and customer portfolios.

 

For SV, only cash in the currency of the underlying trade is accepted as collateral.

Regulatory Capital Treatment 

Members may engage with regulators in their home jurisdictions to seek guidance 

on applicability of regulatory capital relief for collateral placed with SGX-DC.
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SGX SAFEGUARDS 

CLEARING FUND & DEFAULT MANAGEMENT 

 

The Clearing Fund is designed to cover potential market risk, over and above MM, 

in stressed conditions following a clearing member default.

 

SGX-DC will maintain a single default fund across the following market segments:

1. Exchange traded derivatives

2. OTC commodities and freight forwards

3. OTC financial derivatives including IRS and FX Forwards.

In the event of default, members of defaulting market segment will be assessed 

prior to other members.

The Clearing Fund will have a scalable structure in proportion to growth of business, 

members’ exposure, and number of asset classes. Fund contribution is

proportionate to the risk exposures of members’ cleared trades. 

Daily monitoring on the adequacy of the Clearing Fund will be conducted based on 

the rolling average 3 months’ historical margin requirements.

The following diagram illustrates the sequence of utilisation of the Margins and 

Clearing Fund in the event of default of a Clearing Member:

Please refer to page 14 for an illustration on a Clearing Member’s obligations to the Clearing Fund 

and page 15 on the components of the Clearing Fund.

 

Default Management Group 

A Default Management Group comprising SGX-DC risk managers and default 

managers (appointed members) will be established.

 

Management of defaulting member’s OTC positions 

SGX will leverage on the OTC market expertise of the default managers to manage 

the defaulting member’s OTC positions in the event of default. 

This will include transfer of clients’ positions to non-defaulting members, hedging 

of the defaulting member’s portfolio by appointed traders, and processes to 

facilitate liquidation of the hedged portfolio.

Margin 

requirement

& excess collateral 

of defaulting 

member

Defaulting

member’s 

Security 

Deposit

SGX-DC

contribution 

to 1st layer 

default fund

Non-defaulting 

members’

Security 

Deposits in 

same segment

Further 

assessment 

of members in 

the same

segment

Any other 

contribution 

By SGX-DC 

Security 

Deposits and 

Further 

assessment 

of other

members
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ILLUSTRATION: 

Clearing Fund 

 

Question: What is the maximum liability of a clearing member at any point in time? 

In the event of a default, the total liability of each surviving Clearing Member is the sum of the 

Security Deposit and the Further Assessment. The apportionment of the liability would be 

proportionate to the member's margin requirements.

(a) Security Deposit is set at 3% of the Margin Requirement for a Clearing Member, subject to 

a minimum of US$5M. This will increase proportionate to the member's size of 

exposure. This amount is placed with the Clearing House.

(b) Further Assessment is up to 3 times the Security Deposit. Only a portion of this 

amount needs to be funded (1 time SD) and placed with the Clearing House.

The Security Deposit and Further Assessment will be applied in direct proportion of each 

member’s security deposit requirement relative to other non-defaulting members’ security 

deposit requirement.

Please note that all of the above are subject to approval from MAS.

Example 1: 

Maximum liability of a Clearing Member A 

 

Assuming that a Clearing Member A has a total Margin Requirement of USD 200 million for its 

exposure to the clearing house, the required contribution to the clearing fund and its maximum 

liability in the event of another member’s default is calculated as follows:-

Security Deposit = 3% x Margin Requirement = US$ 6 M

Further Assessment = 3 x Security Deposit = US$ 18 M

Maximum liability = Security Deposit + Further Assessment = US$ 24 M 

 

 

Example 2: 

Application in direct proportion of member’s requirement relative to other non-defaulting 

members’ requirement 

 

Assume that in the event of a default of Clearing Member B, the losses to the clearing house 

amounted to US$ 300 M. The losses after applying the defaulting member’s margins, excess 

collateral, and security deposit and SGX capital is US$ 20 M.

 

Assume further that Clearing Member A’s margin requirements is 10% of the total margin 

requirements of all non-defaulting members.

 

In this case, the liability of Clearing Member A will be US$2 M [10% of US$20 M ].

 
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GLOSSARY 

 

MARGINING 

Maintenance Margin ("MM")

The maintenance margin is the minimum amount to be collateralized by the Clearing Member to the Clearing House 

to protect the Clearing House from future normal market movements against a Clearing Member’s open positions 

(based on historical simulation) in the event of the member’s default. This amount is calculated by the Clearing 

House and has to be funded fully with cash and/or acceptable collateral. This is referred to as “initial margin” at 

LCH.Clearnet SwapClear.

Settlement Variation ("SV")

The settlement variation is the calculated profit or loss arising from a comparison between the (mark-to-market) 

values of the open positions with reference to the previous day’s value. The Clearing House shall receive payment 

from, or pay to, Clearing Members the SV at least once a day. This is to ensure the adequacy of the MM to buffer for 

Profit-and-Loss swings under normal market conditions and to prevent the accumulation of losses. This is referred 

to as “variation margin” at LCH.Clearnet SwapClear.

 

CLEARING FUND 

Security Deposit (“SD”)

The Security Deposit is the contribution by Clearing Members to the Clearing Fund. The amount is calculated as the 

higher of (a) 3% of Margin Requirements, and (b) US$5 million. This has to be fully funded with the Clearing House.

Further Assessment (“FA”)

This is the further obligation on non-defaulting Clearing Members in the event of a default by a clearing member. 

The amount is calculated and capped up to a multiple of the Clearing Member’s Security Deposit. A portion of the 

Further Assessment has to be funded partially with the Clearing House.

Clearing Fund (“CF”) 

The Clearing Fund is designed to cover potential market risk, over and above MM, in stressed conditions following a 

clearing member default. The components of the clearing fund are detailed in the table below:-

 

SGX-DC capital & reserves, financial guarantee 

and/or default insurance SGX’s contribution to the clearing fund 

Security Deposits of non-defaulting Clearing 

members

For Exchange Traded Derivatives & OTC Commodities:

Minimum of US$500,000 

For OTC Financial Derivatives:

Minimum of US$5 million 

Based on 3% of members’ average risk margin’ amounts 

over a 3-month period applied to in direct proportion of each 

member’s security deposit requirement relative to other 

non-defaulting members’ security deposit requirement

Further Assessment by SGX-DC on nondefaulting Clearing Members

Limited to up to 3 times of respective member’s security 

deposit requirement

Members will be required to fund a proportion of this FA, 

based on member’s historical margin

SGX-DC second tier capital SGX’s additional contribution to the clearing fund
Singapore Exchange Limited 

2 Shenton Way #19-00 SGX Centre 1

Singapore 068804

Tel: (65) 6236 8888

Fax: (65) 6236 6495

Website: www.sgx.com