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New Norms for Risk Management in Clearing Corporations

Finsec Law Advisors

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SEBI has issued new norms, vide circular dated August 27, 2014, relating to core settlement guarantee fund (CSGF), stress testing and default procedures for risk management in clearing corporations. In 1997, SEBI issued the Guidelines for Settlement Guarantee Fund (SGF) at Stock Exchanges, which was a rudimentary set of guidelines which laid down the composition and mode of utilisation for a Settlement Guarantee Fund. Additional requirements were then prescribed under the SCR (SECC) Regulations, 2012 and an amendment to the same was made on September 02, 2013 to adapt with the structural changes in the Indian securities market since 1997.

SEBI under the new risk management norms has introduced the concept of a Core Settlement Guarantee Fund (CSGF). Broadly, 50% of minimum required corpus for the CSGF would be contributed by clearing corporations, atleast 25% by stock exchange and upto 25% by the clearing members. The CSGF would have no exposure and would be readily and unconditionally available to meet settlement obligations in case any clearing member fails to honour its settlement obligations.

The norms also prescribe that clearing corporations would be required to conduct stress tests on a daily basis. Stress tests are measures adopted to measure, monitor, and manage a clearing corporation’s credit exposure and to ensure adequate availability of liquid resources. These tests provide a basis for ascertaining the minimum corpus required to be maintained in the CSGF.

In addition, the norms prescribe a detailed default waterfall which is essentially a list of monies, in an order of priority, utilised to meet liabilities in the case of default, CGSF being one of them. This has been the most laudable development as it seeks not only to ring-fence each segment of clearing corporation from defaults in other segments but also addresses the current issue of losses being attributed to non-defaulting clearing members as these new norms lay down the manner for limiting the liability of non-defaulting members.

It may be recalled that the legal sanctity of the priority of the clearing corporation’s (then exchange’s) rights were ensured by the Supreme Court’s ruling in Vinay Bubna v. Stock Exchange, Mumbai.