The Securities and Exchange Board of India (SEBI) on December 21, 2020 has issued the Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC).
To adhere to the regulations, circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014 which specifies clearing members were permitted to bring their contribution towards Core Settlement Guarantee Fund, in the form of Central Government Securities, in addition to Cash and Bank Fixed Deposits and Circular no. SEBI/HO/MRD2/DCAP/CIR/P/2020/01 dated January 03, 2020 which specifies the contribution by a non-defaulting member in the Default waterfall of Clearing Corporations has been modified.
The following modifications have been made:
• Clause 8A, in circular dated August 27, 2014 which specifies the contribution to the core SGF of LPCC, has been inserted, namely:
1. 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, in the manner specified by the Board.
2. CMs contribution to Core SGF shall be risk based and equivalent to deficit in MRC post contribution by Issuers. The said contribution by CMs shall be subject to the following conditions:
(a) that 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).
(b) that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system.
3. LPCC shall transfer profit to the Core SGF in terms of Regulation 22E (1) above, within 30 days of adoption of financial statements by the shareholders in the Annual General Meeting. LPCC may make additional contribution to Core SGF from its own funds. LPCC’s contribution to core SGF shall be considered as part of its net worth.
• After Clause 14 of the said Circular dated August 27, 2014 read with Circular dated January 03, 2020, Clause 14A, which specifies the further contribution to the recoupment of the core SGF of LPCC, has been inserted, namely:
“Requisite contributions to Core SGF by various contributors (as per clauses 7 and 8A), except upfront contribution by Issuers (as per clause 8A.a) and annual contribution of profits by LPCC (as per clause 8A.c), for any month shall be made by the contributors before start of the month. In the event of usage of Core SGF during a calendar month, contributors shall, as per usage of their individual contribution, immediately replenish the Core SGF to MRC. However, such contribution towards replenishment of Core SGF by the members would be restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by Clearing Corporation to market participants.”
• In Circular dated August 27, 2014 read with Circular dated January 03, 2020, Clause 16A which specifies the default waterfall of the LPCC, has been inserted, namely:
“The default waterfall of CC shall generally follow the following order:
1. monies of defaulting member (including defaulting member's primary contribution to Core SGF.
2. Insurance, if any
3. Issuers contribution to Core SGF.
4. LPCC resources (equal to 5% of MRC
5. Remaining LPCC resources (excluding INR 100 Crore)
6. Remaining LPCC resources to the extent as approved by SEBI
7. Capped additional contribution by non-defaulting members
8. Any remaining loss to be covered by way of pro-rata haircut to pay outs.
[Circular No. SEBI/HO/MRD2/DCAP/CIR/P/2020/245]
