SGX Takes Aim at Risk Checks

Terry Flanagan

Exchanges around the world are looking to implement new pre-trade checks in an effort to shore up their risk management controls.

“SGX has always advocated and applies a regulatory regime which stays abreast of market developments so as to ensure the marketplace remains fair, orderly and transparent,” said an SGX spokesperson.

The SGX is currently in the process of soliciting responses from the public on a set of proposed rule changes aimed at enhancing pre-trade risk checks and controls on the SGX Derivatives Trading Market, in preparation for SGX’s planned offshore liquidity hubs in London and Chicago. Among the proposed rule changes are: introducing member requirements for customers who use their own order management systems; requiring members to put in place minimum credit standards for customers with direct market access; and requiring members to have comprehensive programs for maintaining the integrity of their order management systems. The new changes better align the SGX with international standards.

The pre trade risk controls seek to enhance risk management by allowing trading limit checks to be conducted at the Exchange’s matching engine prior to the execution of an order, according to the SGX spokesperson. This is a trade level check of increasing importance in today’s environment of computer assisted, high-speed trading. Such controls have been introduced by other international exchanges.

Separately, the Asean Trading Link is scheduled to launch in June. The initiative consists of exchanges from several Southeast Asian countries, including Singapore, Thailand, Vietnam, Indonesia, Malaysia, Vietnam and the Philippines. Singapore Exchange and Bursa Malaysia are scheduled to link up first, followed by Thailand later this year. The Asean Trading Link will provide brokers of participating Asean exchanges with the infrastructure to input orders directly on another participating Asean exchange. While the foreign broker may access SGX securities market only as a customer of an SGX broker, it will not require its SGX broker to physically assist with trade execution

As international interest in the Asian market grows, the local stock exchanges have found it difficult to compete with the much larger markets of China, India and Japan. By grouping together, the Asean Trading Link will enable the member exchanges to better position themselves among the global markets.

The initiative intends to follow the example set by the European Union in forming an interconnected economic community, with capital freely flowing between nations. SunGard has been tapped as the technology provider for Asean Trading Link.

As well as the benefit of scale, the venture will also act as a passport to take advantage of investment opportunities that exist across the region but have been difficult to access due to the fragmented market structure and lack of cross-border integration.

The SGX in March saw a strong month in terms of derivatives trading volume. Daily average volume grew 9% compared to February with 353,683 contracts, but slid 7% year-on-year. China A50 futures volume more than tripled to 661,587 contracts from a year earlier, MSCI Taiwan futures trading grew 9% year on year to 1.6 million contracts and S&P Nifty futures volume also increased 9% from a year earlier to 1.3 million contracts. Nikkei 225 futures volume was 3.1 million contracts, down 37% from the spike in activity a year earlier caused by high volatility in the Japanese equity markets. Compared with February, Nikkei 225 futures trading grew 29%.

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