By Gabriel Chen

THE Singapore Exchange (SGX) is proposing a number of changes to ensure that there will be enough funds available to meet potential trading losses if any of its securities members go belly up.

The consultation paper, which is open for public comments, is basically suggesting that the Central Depository's (CDP) clearing fund be increased.

Think of this fund as a buffer against what is known as systemic risk - if one firm fails to meet its obligations, it could affect other companies in the sector.

If the firm goes under due to its need to cover its losses, it could hit other firms as the industry would face settlement risk.

The CDP clearing fund comprises funds from the CDP itself, which operates the clearing system by acting as the counter-party for every trade matched on the bourse's trading platform.

It also includes insurance contributions and funds from its 24 clearing members. These include BNP Paribas Securities (Singapore), Citigroup Global Markets Singapore Securities, DBS Vickers Securities (Singapore), Phillip Securities and JP Morgan Securities Singapore.

Under the proposed changes, the CDP will increase its cash contribution from $25 million to $30 million.

Member firms, which must contribute a total of at least $15 million between them, will have their contributions raised to at least $30 million under the new changes.

Of that total amount of $15 million, individual firms now contribute at least $250,000 while those with a higher trading turnover chip in more. This will rise to at least $1 million for each company with the bigger operators up for more.

The SGX said yesterday it would review the contribution structure one year after it is implemented. If the securities daily average value remains above $1 billion, it plans to raise members' total contribution to $40million, from the proposed $30 million.

Each member's contribution will be determined by individual turnover. In other words, a firm with a higher turnover should make a bigger contribution.

The insurance component of the fund of $45 million will stay the same.

The SGX also said that under the new rules, if a clearing member has a large securities settlement exposure, it will ask the firm to deposit additional collateral. This can happen if the member's risk exposure is larger than the clearing fund.

It cited three reasons for the review.

First, there has been an increase in securities turnover on the SGX market, but the clearing members' contribution of $15 million is 'too low' compared with the risk arising from their outstanding trades.

The SGX called the current requirement for clearing members 'unduly rigid and does not cater for growth'.

The second point concerns individual contribution by each firm. The SGX said that each firm's contribution to the clearing fund is 'too low' compared with the potential loss that may arise from their outstanding trades.

The final reason is that there has been more institutional participation which has resulted in what it calls 'greater concentration risks'.

Basically, as member firms rope in more institutions in trading activity, there might be more risks involved.

This article was first published in The Straits Times.