Default procedures

Although SFE Clearing's direct exposure is only to its Clearing Participants, if a Participant holds large positions for a client who subsequently defaults, this could affect both the solvency and NTA of the Clearing Participant concerned. SFE Clearing carefully monitors client positions and may impose additional margins on a Participant should it believe that the size of its client positions are sufficiently large to potentially prejudice its financial position, in the event of a client default.

A series of prolonged daily settlement losses sustained against a Clearing Participant's house clearing account could potentially result in an erosion of the Participant's NTA. SFE Clearing monitors Participants' daily settlement amounts through maintaining a historical database (both house and client clearing). Cumulative positions are also reviewed and assessed daily.

Additional margin calls or request for an increase in the NTA of the Clearing Participant may be made by SFE Clearing on a Participant to rectify any exposures or trends SFE Clearing considers unacceptable.

In the event of a Participant default, the following table shows the order in which the available funds are to be applied after the application of margins.

Order and priority of capital used in the event of default

Source Size Liquidity
1. Commitment of defaulter > 2m* Cash, letter of credit
2. Available SFE Clearing capital 100m Cash, Subordinated Loan
3. Commitment of non-defaulting Participants ~ 118m Cash, Letter of credit
4. Insurance cover 150m Available within 10 days of claim

*Contributions reflect Participants' clearing activity with the minimum contribution being $2 million

If the default continued to remain unsatisfied after the application of capital, commitments and insurance, SFE Clearing may use other funds available to it or to its parent to meet the outstanding obligations. It also has the capacity to call additional 2nd level commitment contributions up to $30 million from its remaining Clearing Participants for the existing default or to replenish its guarantee. Clearing Participants are obliged to make such contributions. In addition, SFE Clearing can request additional contributions from Participants. In this case, payment is not compulsory but failure to comply could result in the forfeiture of clearing participation.

It should be noted that the SFE Clearing guarantee extends only between SFE Clearing and its Participants. Clients of Clearing Participants are effectively creditors of the Clearing Participant with whom they hold their account. Assets held by a Clearing Participant on behalf of non-defaulting clients are potentially at risk, should there be a default in their Clearing Participant's Client Account, which cannot be met by the Clearing Participant. For further detail, please refer to SFE Notice 050/06 on the SFE website. The SFE Clearing Guarantee insulates Clearing Participants (and indirectly their clients) against the risk of loss which may arise from default by a Clearing Participant(s) other than the one where their positions are held, or from their Clearing Participant's proprietary trading account.

It should also be noted that many of the compulsory protection mechanisms outlined in this document, such as House and Client Clearing Account segregation serve to reduce a client's credit exposure to its futures broker.

Types of default

The risk management and financial surveillance techniques of SFE Clearing are specifically designed to prevent a Clearing Participant from defaulting on its obligations.

It is worth noting that there has never been an SFE Clearing Participant default on their obligations and as a consequence the $400 million guarantee has not been called upon. However the following summarises the steps that would be taken were such an event ever to occur.

If a Clearing Participant default occurs, SFE Clearing has recourse to wide-ranging powers within the Clearing Rules to assist in managing and minimising the financial impact to the clearing house of any such default.

House default

If a Clearing Participant were unable to meet its financial obligation and the default occurred in its House Clearing account, SFE Clearing may act immediately to:

  • Attempt to transfer all segregated client positions and moneys to another Clearing Participant
  • Take control or liquidate the positions in the House Clearing Account or in both the House and Client Clearing Account
  • Apply the Clearing Participant's commitment and House initial margin deposits to the defaulting Participants position and loss.

Client assets (positions and/or moneys) on deposit with or in the control of SFE Clearing or its participants may not be used or impaired by SFE Clearing in the case of a Clearing Participant default resulting from House activity.

Client default

If a Clearing Participant were unable to meet its financial obligation and the default occurred in its Client Clearing account, SFE Clearing may act immediately to:

  • Attempt to transfer non-involved client positions and monies to another Clearing Participant/s
  • Take control of or liquidate Client and House positions
  • Apply the Clearing Participant's commitment and Client and House initial margins of the defaulting Participant to the position or loss

It should be noted that SFE Clearing has the right to apply toward the default all Client initial margins in the defaulting Clearing Participant's account.

Accordingly, initial margins deposited by Clients not causing the default are potentially at risk if there is a default in the Client account of their Clearing Participant.

Should the defaulting Clearing Participant's obligation not be fully satisfied by the above steps, SFE Clearing would apply its available capital set aside specifically for this purpose, followed by the commitments of the non-defaulting Clearing Participants and finally the 3rd party insurance cover.

It should be noted that in the forty years in which SFE Corporation Limited has been operating as a futures exchange and the ten years as a clearing and settlement organisation utilising both the financial safeguards and risk management techniques described in this document, there has never been an incidence of Clearing Participant Default.