Sebi to revamp settlement guarantee fund norms

Likely to introduce core fund and limit the liability of non-defaulting members

The Securities and Exchange Board of India (Sebi) is set to issue fresh guidelines on the settlement guarantee fund (SGF), which could see the introduction of a core fund and limit the liability of non-defaulting members.

The capital markets regulator undertook the revamp of SGF, a corpus used for settlement of trades during defaults, following the Rs 5,600-crore settlement crisis at the National Spot Exchange (NSEL) a year ago.

According to sources, the new framework might mandate setting up of a core fund within the SGF, but members will not be able to take any exposure against this. A core fund is aimed at providing extra cushion in trade settlement.

RAISING THE GUARD

• Settlement guarantee fund to have a core fund
• Clearing members can’t take exposure against core fund
• Exchanges to contribute 25% of total assets in core fund
• Contribution by non-defaulting member would be capped in case of default by other member
• Clearing corporation to maintain corpus of at least Rs 100 crore as capital adequacy

All intermediaries, including stock exchanges, clearing corporations (CC) and brokers, will have to contribute towards the core fund.

The exchanges will be required to contribute 25 per cent of the total assets in the fund, while 50 per cent will be contributed by the CC. However, clearing members cannot contribute more than 25 per cent of the total fund size, people with direct knowledge of the development said.

Sebi will chalk out the formula for minimum corpus for the core fund after consulting market players. The core fund is likely to set a minimum average erosion in SGF on a monthly basis over a period of time.

In the revised guidelines, Sebi might also address market players' concerns to limit the liability of non-defaulting members.

Now, if SGF isn't able to meet the liability in case of default, the non-defaulting members can be asked to meet the default obligation.

The new norms will ring-fence non-defaulting members segment-wise from the risk of default in other segments.

"The contribution by the non-defaulting member in case of default would be capped. We are yet to finalise the liability for members, but it is going to be a subjective cap and CCs would need to devise a framework for it," said an official who did not wish to be named.

Currently, the initial capital maintained by brokers with exchanges as well as a smaller portion of trading turnover goes towards the SGF. Even exchanges and the CC have to make contribution towards the fund.

The Bimal Jalan committee in 2010 recommended that a portion of the stock exchange profit go to the SGF, but it wasn't made mandatory by the regulator.

Currently, SGF at National Stock Exchange's and BSE's clearing corporations take contributions only from members on an on-going basis.

Under the new norms, Sebi might put the responsibility on exchanges and clearing corporations to ensure that the corpus in SGF does not fall below 80 per cent of the minimum corpus.

The markets regulator had formed a risk management review committee to address the issues on safeguarding investors and members in case of default.