SEBI sets framework on the core settlement guarantee fund
22 December 2020 India
Image: muratart/Adobe Stock
The Securities and Exchange Board of India (SEBI) has set out the core settlement guarantee fund (SGF), stress testing and default waterfall procedures in its circular ‘Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC)’.
LPCC is an entity established to undertake the activity of clearing and settlement of repo transactions.
The procedures have been set out in order to enhance the robustness of the risk management system in the clearing corporations.
In April 2017, clearing members were permitted to bring their contribution towards the Core Settlement Guarantee Fund, in the form of central government securities, in addition to cash and bank fixed deposits.
Meanwhile, norms relating to the contribution by a non-defaulting member in the Default Waterfall of Clearing Corporations were modified in January this year.
In October this year, SEBI notified the Securities Contracts (Regulation) to permit setting up a limited purpose clearing corporation for clearing and settlement of repo transactions in debt securities.
Regulation 22D of the SECC Amendment Regulations, 2020, provides that the “contribution to the fund as specified in regulation shall be made by the recognised limited purpose clearing corporation, the clearing members and issuers of the debt securities”.
Any shortfall in the fund will be replenished by the recognised limited purpose clearing corporation to the threshold level as specified by SEBI.
The regulator said: “Contribution of issuers of debt securities to core SGF shall be equivalent to 0.5 basis points of the issuance value of debt securities per annum based on the maturity of debt securities, to be collected upfront.”
The clearing member (CM) primary contribution will be risk-based and equivalent to the deficit in a minimum required corpus post contribution by issuers.
However, the contribution is subject to certain conditions.
SEBI said: “No exposure shall be available on Core SGF contribution of any CM (exposure-free collateral of CM available with CC can be considered towards Core SGF contribution of CM), and that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system.”
Also included in the conditions is the right for LPCC to have the flexibility to collect CM primary contributions.
This will include flexibility to either collect the CM primary contribution upfront or staggered over a period of time.
In case LPCC does not seek contribution from CM or seeks staggered contribution, the remaining balance shall be met by LPCC to ensure the adequacy of total Core SGF corpus at all times.
SEBI explained that such LPCC contributions shall be available to LPCC for withdrawal as and when further contributions from CMs are collected/received.
Elsewhere, SEBI explained this circular was issued to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.
Click here to read the circular in full.
LPCC is an entity established to undertake the activity of clearing and settlement of repo transactions.
The procedures have been set out in order to enhance the robustness of the risk management system in the clearing corporations.
In April 2017, clearing members were permitted to bring their contribution towards the Core Settlement Guarantee Fund, in the form of central government securities, in addition to cash and bank fixed deposits.
Meanwhile, norms relating to the contribution by a non-defaulting member in the Default Waterfall of Clearing Corporations were modified in January this year.
In October this year, SEBI notified the Securities Contracts (Regulation) to permit setting up a limited purpose clearing corporation for clearing and settlement of repo transactions in debt securities.
Regulation 22D of the SECC Amendment Regulations, 2020, provides that the “contribution to the fund as specified in regulation shall be made by the recognised limited purpose clearing corporation, the clearing members and issuers of the debt securities”.
Any shortfall in the fund will be replenished by the recognised limited purpose clearing corporation to the threshold level as specified by SEBI.
The regulator said: “Contribution of issuers of debt securities to core SGF shall be equivalent to 0.5 basis points of the issuance value of debt securities per annum based on the maturity of debt securities, to be collected upfront.”
The clearing member (CM) primary contribution will be risk-based and equivalent to the deficit in a minimum required corpus post contribution by issuers.
However, the contribution is subject to certain conditions.
SEBI said: “No exposure shall be available on Core SGF contribution of any CM (exposure-free collateral of CM available with CC can be considered towards Core SGF contribution of CM), and that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system.”
Also included in the conditions is the right for LPCC to have the flexibility to collect CM primary contributions.
This will include flexibility to either collect the CM primary contribution upfront or staggered over a period of time.
In case LPCC does not seek contribution from CM or seeks staggered contribution, the remaining balance shall be met by LPCC to ensure the adequacy of total Core SGF corpus at all times.
SEBI explained that such LPCC contributions shall be available to LPCC for withdrawal as and when further contributions from CMs are collected/received.
Elsewhere, SEBI explained this circular was issued to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.
Click here to read the circular in full.
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