Lessons in Operational & Credit Risk Management for Exchange Members

SGX RegCo’s Boon Gin Tan and Grace Mok discuss findings from a survey of exchange members. A new guide on credit risk management has also been released.

A key function of capital markets is to allow market participants to manage their exposures to various risks through the transfer of risks. Clearing and Trading Member firms of Singapore Exchange (SGX) that intermediate these risk transfers themselves also face risks. Operational risk is one risk our Members universally face. They are also exposed to credit risks arising from their client relationships.

Working arrangements resulting from COVID-19 have resulted in new challenges on the operational risk front. The fallout from events such as the default of Archegos Capital in March 2021 has brought credit risks into the fore. Such risks – if not properly managed and contained – can have a deleterious contagion effect across the entire market community, and the wider economy.

Partly in response to these events, and to help improve general risk management practices within the SGX market community, SGX RegCo conducted a survey of Members on their risk management practices in two key areas: first, the lessons learnt from COVID-19, which we expect to translate into preparations for the next crisis and second, general credit risk management practices with a special focus on their counterparty credit review practices.

Controls in place with room for improvement

Some key findings from the survey were that most Members had already established controls in place which were sufficient to overcome the challenges arising from COVID-19, and in particular, the operational and market volatility risks. For instance, 100% of Members already provide for connection, hardware and application redundancy.

However, Members also identified some processes that could benefit from further improvements, such as reviews of the robustness of business continuity plans. The shift in working conditions coupled with increased market volatility resulting in a surge in trading volumes across many platforms also created stresses for Members’ trading systems and infrastructure. Controls were in place, yet 72% of Members experienced some type of system downtime in 2020. This points to a potential area for improvement.

Tone at the top key to drive risk culture

On the credit risk management front, effective tone at the top is essential to drive risk culture within the firm. This starts with the Board of Directors and senior management who influence staff behaviour and risk culture through the setting of the firm’s credit risk management strategy, framework and risk appetite, as well as day-to-day credit decisions. Sufficient resources should be allocated to the Risk functions, and training provided to all staff to increase risk awareness within the firm.

Within the SGX Member 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 presided over by senior management, the Board of Directors or the Risk Committees.

Conclusion

We have distilled the detailed responses from the survey into a handy Risk Management Practices (Credit Risk) Guide including a summary of recommended best practices. That guide is available here.

We encourage market participants to consult the guide. In particular, our Members may learn from the guide, how to benchmark against, and learn from, each other. We also hope that this guide will be a useful and practical contribution to the global conversation on improving risk management practices.

Boon Gin Tan is CEO and Grace Mok is Head of Member Supervision at SGX RegCo.

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