APEX’s Board of Directors, through the Board Risk Management Committee (RMC), provides independent oversight, guidance and approval of APEX’s risk management framework, policies, systems, resources and risk limits that are consistent with APEX’s key risks and risk appetite; the types and levels of risk that APEX should undertake to achieve its business objectives; the appropriateness of APEX’s capital management framework, clearing fund structure as well as APEX’s contribution to the relevant clearing funds; and the appropriateness and adequacy of APEX’s long term technology strategy roadmap in line with its business objectives.
APEX’s risk management strategy involves setting up proper risk governance to facilitate effective risk discovery and ensure sufficient capital to cover these risks. Risks are managed within the levels and limits approved by the Board, and a comprehensive framework of policies and procedures are established for the identification, assessment, measurement, monitoring, control and reporting of present and potential financial and non-financial risks.
APEX manages risk through an organizational control structure which provides a “three lines of defense” model which includes risk ownership, risk oversight and independent audit / validation.
As a prudent operator of the Exchange and Clearing House, APEX performs daily risk monitoring as well as prudent margining and collateral management, ensuring guaranty fund sufficiency and effective default management processes to safeguard the integrity and security of its clearing system.
Clearing Members are required to post Margins with APEX Clear to protect the Clearing House from potential financial liabilities and obligations arising from the open positions held under a defaulting Clearing Members’ books. APEX Clear requires its Clearing Members to procure all the applicable margins (Variation Margin, Initial Margin, Delivery Margin & Special Margin) from their Customers.
Margin requirements are calculated based on SPAN® Margin Methodology where it considers: 1) the sizes and the distributions of Positions; and 2) the potential price movements (e.g. Price Scanning Range) and other potential price differentials (e.g. Spread Charges). APEX Risk Management unit reviews and sets prudent Margin Parameters to ensure that the margin coverage is at 99% confidence level.
APEX Clear may also impose special margins due to any additional risk concerns such as concentrated positions, excessive exposures, reduced available liquidity, weaker credit quality, large price movements in the physically deliverable contract’s underlying markets or when price limits are breached. The guidelines for Special Margins are as follows:
Special Margin Type
When a Clearing Member holds a significant portion of net open position in APEX for a Product, liquidating such positions may adversely affect the Futures Market. APEX Clear may impose additional Special Margins for such situations.
When a Clearing Member incurs a total stress testing losses (TSTL) that represents more than a certain percentage of the Guaranty fund, APEX Clear may impose additional Special Margin to reduce its exposures to this Clearing Member.
Liquidity Concerns on a Clearing Member
When a Clearing Member’s liquid resources are insufficient to cover its potential margin call, APEX Clear may require the Clearing Member to increase its available liquid resources or impose additional Special Margin to address this concern.
When a Clearing Member’s credit standing, as assessed through APEX Clear’s internal credit rating model, external credit rating /outlook downgrade of CM or its parent/affiliate, adverse market information/indicators on CM or its parent/affiliate or any other specific issues or concerns relating to the CM, deteriorates, APEX Clear may impose additional Special Margin to address this concern.
When a Contract has entered its Delivery Period and its underlying Cash Market has moved significantly, APEX Clear might impose additional Special Margin to address the risks that a Participant does not meet his delivery obligations and the Margins (Initial Margin and Delivery Margin) from him are not sufficient to cover the losses due to the market movements.
Price Limit Concerns
When a Contract’s settlement price is limited by the preset Price Limit while the contract underlying’s price has deviated further, APEX Clear may impose additional Special Margin to cover the exposure.
Guaranty Fund Structure
In order to preserve the integrity of the Clearing House in the event of member default, a Guaranty Fund is set up to cover the potential losses that may arise from members’ default. The Guaranty Fund is sized, using stress tests based on scenarios that are extreme but plausible, to be sufficient to cover potential losses according to MAS’s requirements. It is monitored daily and recalculated monthly based on the previous 60 days data. Member contributions are based on the relative initial margin and delivery margin requirement subject to a minimum contribution.
In the unlikely event of members’ default, APEX Clear’s Guaranty Fund waterfall is as follows:
1) Defaulting Clearing Member’s Margin Collateral and Guaranty Fund contribution and other assets placed with APEX Clear;
2) 60% of APEX Clear’s mandatory contribution to the Guaranty Fund (APEX 1st loss layer)
3) Guaranty Fund contribution of surviving Clearing Members shared equally up to US$500,000 each (Surviving CM 1st loss layer)
4) Remaining 40% of APEX Clear’s mandatory contribution to the Guaranty Fund (APEX 2nd loss layer)
5) Remaining Guaranty Fund contributions (if any) of surviving clearing members as contributed on the date of Declared Default; (Surviving CM 2nd loss layer)
6) Any excess contribution to the Guaranty Fund (if any) by APEX Clear (APEX 3rd loss layer)
APEX Clear has in place default management plans and procedures to govern the processes that apply to Members in the event of a Clearing Member default. These procedures are regularly tested to facilitate transparent and practical market action in stress situations.
In the event of a Clearing Member default, APEX Clear will liquidate the House positions of the defaulting Clearing Member as soon as possible to prevent the accumulation of losses. APEX Clear allows the transfer of Client positions of the defaulting Clearing Member to another non defaulting Clearing Member, provided the following 3 conditions are met: 1) APEX Clear receives notice of the intention to transfer and the choice of the non defaulting Clearing Member within 24 hours of the Declaration of Default; 2) APEX Clear assesses the non defaulting Clearing Member to be of acceptable financial condition to accept the transfer; and 3) the non-defaulting Clearing Member consents to accepting the transfer of positions. Otherwise, APEX Clear will similarly liquidate the Client positions of the defaulting Clearing Member as soon as possible to prevent the further accumulation of losses.
Any unsettled House positions in Delivery Mode under the defaulting Clearing Member will be treated as Failed Delivery and settled according to the provisions in the Clearing Rules and Contract Terms. Any unsettled Client Positions in Delivery Mode can be allowed to continue under an alternative delivery process. All costs and expenses sustained by APEX Clear in connection with the above steps shall be charged to the account of the defaulting Clearing Member.