SGX Pre-Trade Risk Controls - Trading Technologies

Pre-Trade Risk ControlsIndustry Briefing15 July 2011Version 1.0

Contents1Introduction and Background2Overview of Pre-Trade Risk Controls3Changes to SGX Futures Trading Rules4Impact to Members5Timeline6Questions & AnswersSGX The Asian Gateway 1

Introduction and Background Designed to complement Members’ existing risk controls (not replace them)A backstop system outside the clearing member’s infrastructure that can limit the risk exposurethe member can accumulate intra-day. In-line with initiatives by Exchanges in major markets (e.g. CME & Eurex) A set of tools offered to Clearing Members to control the trading limits of directmarket access (DMA) clients that connect directly to QUEST-DT Provide Trading-Limit management capabilities to CMs with minimal impact onTrading-Engine LatencySGX The Asian Gateway Pre-Trade Risk Controls 2

Market Research Direct engagement with FIA Asia Risk Committee Surveyed Risk controls of other Exchanges– Examined the methods used by CME, ICE, Eurex, NYSE Euronext & ASX Risk control methods employed by Order Management Systems - TradingTechnologies, Pat Systems, CQG, Sungard / GL TradeSGX The Asian GatewayPre-Trade Risk Controls 3

2Overview of Pre-Trade Risk ControlsSGX The Asian Gateway Pre-Trade Risk Controls 4

Current ConnectivityClearing Member sets Pre-Trade limits on its trading clients by either of the following methods:1. Interfacing / integrating its risk systems with the order management system of the client2. Exclusive control of the client’s order management system’s built-in risk toolsRiskControlsClientOrderManagementSystemsNew Order MessagesMatched Order MessagesClearingMemberAPI IDConnectionNetwork GatewayTrading EngineClearingSystemRisk Control MessagesSGX The Asian GatewayPre-Trade Risk Controls 5

Current Connectivity (Bypass Privileges) No pre-trade limits check for clients with Bypass Privileges Clearing Member is required to conduct near real time post-trade monitoringand meet other criteria as defined in the Futures Trading Rules.ClientOrderManagementSystemsNew Order MessagesMatched Order MessagesClearingMemberAPI IDConnectionNetwork GatewayTrading EngineClearingSystemSGX The Asian GatewayPre-Trade Risk Controls 6

Connectivity with Pre-Trade Risk ControlsDirect Market Access (DMA)1Client is able to connectdirectly to the exchangewithout having to passthrough the ClearingMember’s infrastructure2Clearing Membernow sets Pre-Tradelimits using SGXRisk ControlsSGX RiskControlsRisk Control ServerRX ModuleRisk FilterSideCarClientOrderManagementSystemsNew Order MessagesMatched Order MessagesDirect Market Access (DMA)ClearingMemberAPI IDConnectionNetwork GatewayTrading EngineClearingSystemRisk Control MessagesSGX The Asian GatewayPre-Trade Risk Controls 8

FIA RecommendationsFIA Risk Functionality Recommendation SGX Remarks1 Maximum Order Size (“Fat Finger”) ✓ Members can set an order size limit by product per client2 Set intraday limit by Trader/Account/Firm ✓ The limits can be set at the trading account level3Set max cumulative long and max cumulativeshort position limits✓The positions are converted to notional value and deducted from anoverall long and overall short credit limit4 Include working orders in position calculations ✓5 Ability to raise or lower limits intraday ✓ This can be done in real-time through the web client interface6 Cancel-on-disconnect ✓ This is an existing functionality in our API logins7 Cancellation of orders ✓ This is an existing functionality offered via our Drop Copy API ID8 Set limits at product level △ Members can set a value per product based on a percentage of themargin requirement9 Set intraday position per group of traders ✓10 Kill button ✓The Clearing Member will be able to set limits for a group of accountsas defined by the Clearing MemberThe clearing member can halt trading on a client in real-time bysetting his credit limit to zero11 Price banding / Dynamic limits △Price Banding is an existing functionality built into the trading enginee.g. for NK, hitting the 7.5% upper /lower price limit will trigger a 15-min cooling off period at the matching engine12 Mandatory use of Risk Controls ✓ FIA recommends that this be made mandatory for all13 Set limits via API Interface Possible future enhancement14 Market Maker Sweep Protections Not implementedSGX The Asian Gateway Pre-Trade Risk Controls 9

Risk Control AlgorithmAccounts001002003Risk Group 1Gate 1Order SizeCheckRisk FilterSideCarGate 2Credit LimitCheck004Trading EngineExampleClearing Member setslimits on Risk Group 1which will apply toAccounts 001, 002,003 and 004FX RatesInherited fromClearing System1. Order Size Check 2. Credit Limit CheckProduct Size LimitNK 200SG 200TW 200……Long Limit USD 2,000,000Short Limit USD 2,000,000Product Type 3. MarginFutures 3,000NK Options – Long 80Options – Short 700Futures 2,200SG Options – Long 50Options – Short 500Futures……Options – Long…Options – Short…SGX The Asian Gateway Pre-Trade Risk Controls 10

Risk Group Setup for Clearing Members1ClearingMemberParticipantInterface(PI)2Every Accountmust be linkedto a Risk GroupTrading AccountsCM logs into PI tosetup Risk GroupsRisk Group 1Risk Group 23An Account cannotbelong to more thanone Risk GroupRisk Group 3Risk Group 4TradingEngineNetworkGateway 4The Risk Controls will rejectall orders from an account thatis not linked to any Risk GroupSGX The Asian Gateway Pre-Trade Risk Controls 11

Setting Limits on Risk Groups1Clearing Member applies to SGX for RX Administrator login ID2 Beginning of Day3Batch Update of Risk ParametersVia Flat File SFTP uploadIntra-Day Adjustments1. Credit Limits2. Max Order SizeCredit LimitsLong Limit (Value)Short Limit (Value)Product LimitsMax Order Size*Margin CoefficientsRXAdministratorvia Web Application*Margin Coefficients cannot be adjusted intra-daySGX The Asian GatewayPre-Trade Risk Controls 12

Summary of Operational Processes Clearing Member defines Risk Groups and ensures that all Trading Accounts(including default accounts) are linked to a Risk Group from the Participant Interface Clearing Member applies to SGX Market Access for RX Administrator IDAfter Go-Live Clearing Member uploads beginning-of-day (BOD) limit files via SFTP– Credit Limit File– Product Limit File (Max order size and Margin adjustments) Clearing Member logs into RX Administrator GUI to adjust limits intra-daySGX The Asian GatewayPre-Trade Risk Controls 13

3Changes to SGX Futures Trading RulesSGX The Asian Gateway Pre-Trade Risk Controls 14

Changes to SGX Futures Trading Rules SGX will withdraw Bypass Privileges. Bypass Privileges are exemptions from preexecutionchecks. SGX is of the view that, to preserve a fair and orderly market, alltrades should be subject to automated pre-execution checks that impose tradinglimits and facilitate the management of participants’ risk exposures. Rule 2.8 which provides for Bypass Privileges will be removed together with allassociated references For other rules, there will be minor updates to further clarify and define the riskmanagement and audit requirements of sponsored access These Rule Changes are targeted to take effect in 1Q 2012 pending regulatoryapprovalSGX The Asian GatewayPre-Trade Risk Controls 15

4Impact to MembersSGX The Asian Gateway Pre-Trade Risk Controls 16

Use of Pre-Trade Risk Controls All inbound orders to the SGX DT Market will be routed through the SGX Pre-TradeRisk Controls without exception The default parameters in the Pre-Trade Risk Control system are all set to ZERO i.e.Clearing Members must explicitly set limits on the Risk Controls in order for clients tobe able to trade The setting of credit limits and margin adjustment values on the Pre-Trade RiskControls will be entirely at the Clearing Member’s discretion. SGX will not intervene in the setting of limitsSGX The Asian GatewayPre-Trade Risk Controls 17

Impact to Derivatives Trading Members Ensure readiness of Order Management Systems (OMS) to handle the changes inOrder Amendment, Order Broadcast messages by 7 November 2011:1. Account number is mandatory for Order Amendment request2. Account number amendment is NOT supported. To amend account number, user will needto withdraw and resubmit a new order with the new account number3. A new “Trade information” structure will be added to the Order Broadcast message (BO5)containing traded price and quantity information. Members are encouraged to use thismessage for trade execution update4. A new field “Derived Spread Volume” is added to the Trade Statistic Broadcast message(BD31). This field contains total traded quantity in the instrument due to combo trading. Conformance Testing is mandatory for the above changes Participation in Industry Wide ExerciseSGX The Asian GatewayPre-Trade Risk Controls 18

Impact to Derivatives Clearing Members Ensure all Order Management Systems (OMS) are cutover to new account structureby 29 August 2011 Ensure inactivation of all OMS Trade accounts by 07 October 2011 Participation in Industry-Wide Testing (IWT) Ensure latest version of Participant Interface (PI) is installed to access SGXClearproduction system on 07 November 2011 Ensure that all accounts including the default account are linked to a risk groupSGX The Asian GatewayPre-Trade Risk Controls 19

Nomination for Coordinators Each member firm will be required to nominate:– Primary Business Contact– Primary Technical Contact We will liaise with your nominated coordinators on all matters related to the Pre-Trade Risk Controls initiativeSGX The Asian GatewayPre-Trade Risk Controls 20

5TimelineSGX The Asian Gateway Pre-Trade Risk Controls 21

TimelineJulAugSep Oct Nov Dec1Q201215 JulMember’s Briefing15 Jul – 08 AugAssess Impact08 Aug – 30 SepDev and Conformance08 OctIWT122 OctIWT backupBy 1Q2012All members to haveRisk Controls enabled16 SepMember’s Briefing II07 NovLaunch Risk Controls07 Nov – 1Q2012Members setup Risk Groups and LimitsSGX The Asian Gateway22

6Questions & AnswersSGX The Asian Gateway Pre-Trade Risk Controls 23

Questions and Answers Updated environment documents, technical specifications will be available from:– https://www.sgx.com/sgxclear– https://www.sgx.com/wps/portal/QUESTDT Risk Control User Guides will be available for download from 29 July 2011 For further questions, please contact your SGX business manager or emailquestaccess@sgx.comSGX The Asian GatewayPre-Trade Risk Controls 24

Thank YouThis presentation is being made available to certain authorized recipients for their general information only.While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided in this presentation, they will not be liable for any loss or damage ofany kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on suchinformation. Neither SGX nor any of its affiliates shall be liable for the content of information provided by or quoted from third parties. Examples provided are for illustrative purposes only. Theinformation in this presentation is subject to change without notice.Any recirculation, transmission or distribution of this presentation or any part thereof by any third party requires the prior written permission of SGX. SGX and its affiliates disclaim all responsibilityand liability arising in connection with any unauthorised recirculation, transmission or distribution of this presentation or any part thereof.© SGX Ltd, November 2010www.sgx.comSGX The Asian GatewayPre-Trade Risk Controls 25