Every SGX derivatives trade is novated to SGX-DC, which becomes buyer to every seller and seller to every buyer and manages the resulting credit risk with initial margin, daily settlement variation, a mutualised clearing fund and default procedures. RES 2A tests the clearing chain (customer → member → Clearing Member → CCP), the five clearing-member categories, how margin and settlement prices work, segregation and porting of customer positions, the default waterfall, and the mutual offset system.
4 min read·5 sections
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Must-know for the exam
✓Novation: the bilateral trade becomes two contracts with SGX-DC. Customers contract with their member; the CCP's guarantee runs to Clearing Members.
✓Clearing Member categories: General, Direct, Bank, Remote, FCM (US futures commission merchants). Minimum capital with early-warning thresholds; the CCP can require more from riskier members.
✓Initial margin = performance bond sized by a portfolio risk model (SPAN-style, with offsets for correlated contracts and add-ons for concentration). Maintenance margin is the call trigger; settlement variation is the daily cash mark-to-market against the daily settlement price set by SGX-DC.
✓Customer positions and money are segregated from house positions at member and CCP level; retail money can never fund the member's own obligations; segregation makes porting possible.
✓Default waterfall: defaulter's margin and clearing fund contribution → SGX-DC's committed capital → other members' clearing fund contributions. Other members' customer money is never used.
✓Final settlement: cash-settled contracts are settled against the final settlement price and extinguished; physically settled contracts move into the Delivery chapter's procedures.
✓Mutual Offset System: linked contracts can be transferred between SGX-DC and a partner clearing house so one net position can be held across time zones.
✓SGX-DC is an approved clearing house under the SFA, supervised by MAS; its rules change under MAS oversight.
▸On this page · 5 sections
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Traps that cost marks
→The CCP guarantees performance, not profits.
→Five categories — the rules accommodate banks, local firms, overseas and US participants.
→Early warning sits above the minimum: it triggers reporting and possible directions before the capital requirement is breached.
→Minimum is a floor; risk sets the real requirement.
→Daily settlement resets exposure to zero each day.
→Customer and house are never netted together.
The clearing chain
•A retail customer trades through a member; the member (if not a Clearing Member) clears through a Clearing Member; the Clearing Member faces SGX-DC. Novation replaces the matched bilateral trade with two contracts against the CCP. The customer has no direct claim on the CCP — its contract is with its member — but its positions sit in segregated customer accounts at the Clearing Member.
•Central clearing removes bilateral counterparty risk, settlement risk between the original parties and contagion through chains of exposures. It does not remove market risk. Because the CCP concentrates the whole market's counterparty risk, MAS supervises it as systemically important.
Membership
•SGX-DC's Clearing Rules (application, membership, committees, enforcement, arbitration, delivery, clearing and margins, mutual offset, definitions, transitional) admit General, Direct, Bank, Remote and FCM Clearing Members. Direct members clear their own business; General members clear for customers and non-clearing trading members; Remote and FCM categories give overseas and US participants access.
•Members meet minimum capital and financial requirements with early-warning levels that trigger closer supervision before a breach. The clearing house may prescribe higher requirements for a member based on its volume, positions, margin policies or other memberships.
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