Sebi moots measures to monitor exposure of clearing corporations

Capital markets regulator Sebi on Thursday proposed measures for monitoring the exposure of Clearing Corporations (CCs) to various entities and mitigate the risks.

It has been suggested that any type of exposure of CC should be appropriately monitored and managed. Besides, such exposures should be diversified.

Issuing the proposals, Sebi mentioned about the critical role played by a CC in the securities market ecosystem and that it is exposed to concentration risk.

"... it is important to protect the CC from the risks associated with such entities to which the CC is exposed to and ensure that such exposures of CC are adequately diversified" Sebi said in a consultation paper.

The regulator has comments from the public on the proposals till August 10.

For the purpose of monitoring, Sebi has recommended that CCs should consider several types of exposures.

They include CCs' own funds invested with banks, Core Settlement Guarantee Fund (SGF) corpus deployed with banks, CCs' balances with the bank in its capacity as a clearing bank, and Fixed Deposits (FDs) and bank guarantees lien marked to CCs.

Other exposures include equity shares, mutual funds and debt instruments pledged or re-pledged with CCs, and CCs' similar exposure through their subsidiaries.

With regard to selection of banks, Sebi proposed that CCs should devise well-defined criteria for selection of banks, which needs to be based on parameters such as net worth (Rs 500 crore), capital adequacy, creditworthiness considering long term credit rating of the bank as part of their internal policy.

"CCs shall closely and continuously monitor such parameters and other material events or news surrounding such banks in order to take appropriate steps for mitigating the risks that may arise on account of any significant event," Sebi said.

Further, the watchdog has suggested that the overall daily exposure of a CC, including exposure through its subsidiaries, to a single bank should not exceed 20 percent of the total exposure.

In case of exposure to banks whose rating has been downgraded from the rating AA and above, CCs should rebalance the exposure as soon as possible but no later than three months from such a downgrade.

In addition, Sebi has recommended that CCs should formulate criteria for exposure to equity and debt instruments through clearing members in order to ensure adequate diversification and liquidity.

The total issuer-wise exposure of the CC to equity and debt instruments of a company received through Clearing Member (CM) put together should not exceed 15 per cent of total liquid assets of the CC in both cash and F&O segment.

Clearing corporations should not accept fixed deposits, bank guarantees, equity or debt securities as collateral from CMs, which are issued by themselves or their Trading Members (TMs), or group or associate companies of such CMs or TMs , Sebi said.

CCs are Market Infrastructure Institutions (MIIs) that essentially assume the counterparty or credit risk by interposing themselves between the parties to every trade and thus act as legal counterparties.