Sebi sets norms for core settlement guarantee fund

To enhance risk management systems at clearing corporations

Securities and Exchange Board of India (Sebi) on Wednesday, 27 August 2014 prescribed norms for Core Settlement Guarantee Fund (Core SGF), Default Waterfall and Stress Testing. The guidelines are aimed at enhancing the robustness of the present risk management system of the clearing corporations (CCs) to enable them to deal with defaults of the clearing members much more effectively.

The capital markets regulator said that a core fund must be carved out from the settlement guarantee fund (SGF), which is readily available to meet settlement obligations in case of members failing to honour settlement obligation. No exposure can be taken against this core fund, Sebi said in a press release on Wednesday, 27 August 2014. Stress testing of clearing corporations must be aligned with international benchmarks and added that risks emerging from possible default in institutional trades must be captured in the stress tests, the market regulator said.

Sebi has from time to time put in place various risk containment measures to address the risks involved in the securities market. One such measure prescribed was norms for Settlement Guarantee Fund (SGF) at stock exchanges including corpus, contribution, management, usage and recoupment of the fund corpus.

Atleast 50% of minimum required corpus for the new fund would be from clearing corporations and atleast 25% from stock exchange and upto 25% from clearing member, Sebi said. Penalties levied by clearing corporations will also be credited to Core SGF, the regulator said.

As per the present default waterfall of clearing corporations, residual losses after exhausting resources available in other layers of the waterfall are to be allocated to the non-defaulting clearing members. Thus, effectively under such circumstances there is no limit to the liability of non-defaulting members in the event of extreme loss. The new guidelines have provisions regarding manner for limiting the liability of non-defaulting members. It would also harmonise default waterfall across clearing corporations and would adequately ring-fence each segment of clearing corporations from defaults in other segments.

Powered by Capital Market - Live News