Brokers wary of costs, contra as SGX plans margin rules
Proposed new margin will be first line of defence if member defaults
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Proposed new margin will be first line of defence if member defaults
Kenneth Lim
31 July 2012
Stockbrokers who clear through the Singapore Exchange’s (SGX) Central Depository (CDP) may need to post margin collateral next year; a move that has drawn first-glance concerns about costs and the future of contra trading.
In order to better match members’ obligations with their risk profile, CDP wants to require each clearing member to deposit a margin that is pegged to the member’s contribution to market risk, according to a consultation paper by SGX yesterday.
“This could be the beginning of the end of contra,” a broker said, referring to the current practice where customers can buy and sell stock within the three-day settlement period - essentially net-cash settling short-term positions - without having to put money upfront.
The proposed margin - which will be imposed by CDP on members, not end-users - will be calculated based on market volatility, the size of a member’s net positions, and the market value of the member’s portfolio.
The new margin will be the first line of defence if that member defaults. That will add one layer of protection before CDP taps the existing central clearing fund, which pools contributions from SGX and members. The clearing fund has never had to be used, SGX said.
To help reduce the burden on members, CDP will reduce to $500,000 from $1 million the minimum amount that each member has to contribute to the clearing fund, which will nevertheless continue to hold enough assets to handle the defaults of the member with the largest position and a few more members.
CDP will also remove the requirement for Large Exposure Collateral, which is the current mechanism for getting members who have unusually large positions to post additional collateral.
Whether the move will result in significantly higher trading costs remains to be seen. Beyond the fact that brokers will have to put money aside for the margin, the logistics of compliance could also increase, another broker said.
“The cost will go up but we don’t know by how much and we don’t expect it to be high,” the broker said, explaining that the cost will depend, among various things, on the type of collateral that is accepted for margin.
Passing on the cost to customers could be difficult unless the industry does it together, the broker added, because the first house to raise fees stands to lose customers.
Yeo Lian Sim, chief regulatory and risk officer of SGX, told reporters at a briefing that the tweak may not necessarily raise costs for brokers, noting that the objective was to align CDP with new global best practices.
“We’re not saying we’re just going to add something on top only. What we’ll do is we’ll change the way we do it,” Ms Yeo said. “So in total, if you say this is the amount that should back this volume of trading, that same amount can be achieved but it’s structured differently.”
If costs are higher, one way to pass on the costs to customers would be for members to ask clients to post margin for their trades - which the second broker said would be hard to swallow for many retail customers.
The first broker said the idea of margins for securities trades raises questions about the future of contra trading, a system with which the industry has long had an uneasy romance. While contra can attract retail activity especially from clients with little starting capital, it also leaves brokers highly exposed to end-user default.
“I think potentially, without going too much into the details of the proposals, this is just the first bite,” the first broker said.