Operational and Credit Risk Management Lessons for Exchange Members
SGX RegCo’s Boon Gin Tan and Grace Mok discuss the results of a survey of members of the exchange. A new guide to managing credit risk has also been published.
A key function of capital markets is to enable market participants to manage their exposures to various risks through risk transfer. Clearing and trading firms that are members of the Singapore Stock Exchange (SGX) which themselves engage in these risk transfers also face risks. Operational risk is a risk that our members face universally. They are also exposed to credit risks arising from their relationships with customers.
The working arrangements resulting from COVID-19 have created new challenges on the operational risk front. The fallout from events such as the failure of Archegos Capital in March 2021 has brought credit risk to the fore. Such risks – if not properly managed and contained – can have a deleterious contagion effect throughout the market community and the economy at large.
Partly in response to these events, and to help improve overall risk management practices within the SGX market community, SGX RegCo conducted a member survey on their risk management practices in two key areas: first, lessons learned from COVID-19, which we expect to translate into preparations for the next crisis and, second, general credit risk management practices with particular emphasis on credit review practices counterparties.
Controls in place with room for improvement
Some key findings of the survey were that most Members already had sufficient controls in place to overcome the challenges arising from COVID-19, and in particular, the risks of operational and market volatility. For example, 100% of Members are already planning for connection, hardware and application redundancy.
However, Members have also identified some processes that could benefit from further improvements, such as reviews of the robustness of business continuity plans. Changing working conditions, coupled with increased market volatility, resulting in increased trading volumes on many platforms, have also created strains for Members’ trading systems and infrastructure. Controls were in place, but 72% of members experienced some type of system downtime in 2020. This indicates a potential area for improvement.
Tone at the top key to driving risk culture
On the credit risk management front, an effective tone at the top is essential to fostering a risk culture within the company. It starts with the board of directors and senior management influencing staff behavior and risk culture by setting the strategy, framework and risk appetite for managing the company’s credit risk, as well as day-to-day credit decisions. Sufficient resources must be allocated to Risk functions and training provided to all staff to increase risk awareness within the company.
Within SGX’s membership base, we observed that members generally maintain strong management oversight over their credit risk framework, with over 93% of members having their credit risk management framework chaired by the senior management, the board of directors or the risk committees.
We have distilled the detailed survey responses into a practical guide to risk management practices (credit risk) including a summary of recommended best practices. This guide is available here.
We encourage market players to consult the guide. In particular, our members can learn from the guide, how to compare and learn from each other. We also hope that this guide will be a useful and practical contribution to the global conversation about improving risk management practices.
Boon Gin Tan is CEO and Grace Mok is responsible for member supervision at SGX RegCo.