SEBI Issues New Framework For Core Settlement Guarantee Fund, Non-Defaulting Members

The Securities and Exchange Board of India on Friday came out with a new framework for core settlement guarantee fund and liability of non-defaulting members of clearing corporations.

The move has been taken following deliberations made by SEBI’s risk management review committee and various stakeholders.

A core Settlement Guarantee Fund is a corpus used for settlement of trades during defaults and all intermediaries -- stock exchanges, clearing corporations and brokers -- contribute towards it.

In a circular, SEBI said that requisite contributions to core SGF by various contributors for any month will be made by the contributors before start of the month.

In the event of usage of core SGF during a month, SEBI said the contributors shall, as per usage of their individual contribution, immediately replenish the core SGF to minimum required corpus.

However, such contribution towards replenishment of core SGF by the members would be restricted to only once during a period of 30 days regardless of the number of defaults during the period, it added.

The period of 30 calendar days shall commence from the date of notice of default by clearing corporation to market participant, it added.

If there is failure on part of some contributor to replenish its contribution, same would be immediately met, on a temporary basis during the month in this order -- clearing corporation and stock exchange.

With regard to contribution by a non-defaulting member in the 'default waterfall' of clearing corporations, SEBI said such corporations need to call for the capped additional contribution only once a month regardless of the number of defaults during the period.

Default waterfall is a system in which a clearing corporation applies different types of its financial resources to meet a default loss, such as margins brought in by defaulting participant, clearing funds and its own assets.

"The maximum capped additional contribution by non-defaulting members shall be lower of two times of their primary contribution to core SGF or 10 percent of the core SGF of the segment on the date of default in case of equity or debt segments," SEBI said.

With regard to derivatives segments, SEBI said maximum capped additional contribution by non-defaulting members would be lower of two-times of their primary contribution to Core SGF or 20 percent of the Core SGF of the segment on the date of default.

Besides, the regulator has directed clearing corporations to put in place the adequate systems and issue the necessary guidelines to implement the same.