**Executive Summary:**
SEBI circular SEBI/HO/MRD/DCA/CIR/P/2020/01, dated January 3, 2020, modifies guidelines for Core Settlement Guarantee Fund (SGF) and Default Waterfall for Clearing Corporations (CCs). It restricts replenishment of Core SGF and capped additional contributions by non-defaulting members to only once during a 30-day period following a default notice. Clearing Corporations must implement these changes and amend relevant regulations.
**Key Points / Main Content:**
* **Core SGF Replenishment:**
* Contributors must make requisite contributions to Core SGF before the start of each month.
* If Core SGF is used, contributors must replenish their individual contribution immediately to meet MRC.
* Replenishment by members is restricted to once during a 30-day period, regardless of the number of defaults.
* The 30-day period starts from the date of the default notice by the Clearing Corporation.
* If contributors fail to replenish, the Clearing Corporation (CC) then the Stock Exchange (SE) will temporarily cover the deficit.
* **Default Waterfall - Capped Additional Contribution:**
* CCs can call for capped additional contributions from non-defaulting members only once during a 30-day period from the default notice.
* Non-defaulting members can resign unconditionally within the 30-day period after settling positions, paying contributions and dues.
* Resigned members will not be called for further contributions.
* The maximum capped additional contribution for equity/debt segments is the lower of 2 times the primary contribution to Core SGF or 10% of the Core SGF on the date of default.
* The maximum capped additional contribution for derivatives segment is the lower of 2 times their primary contribution to Core SGF or 20% of the Core SGF on the date of default.
* Shortfalls in recovery from non-defaulting members can be allocated to layer 'VI' with SEBI's approval.
* **Clearing Corporation Directives:**
* Implement adequate systems and issue necessary guidelines.
* Amend relevant byelaws, rules and regulations.
* Inform trading members, clearing members, and custodians about the provisions.
* Disseminate the circular on their website.
* Report the status of implementation to SEBI through the Monthly Development Report.
**Impact Analysis:**
* **Clearing Corporations:**
* *Impact:* Required to modify systems, regulations, and procedures for Core SGF replenishment and default waterfall. Responsible for informing members and reporting implementation status to SEBI.
* *Action Required:* Implement changes, amend regulations, notify members, and report to SEBI.
* **Trading Members, Clearing Members, and Custodians:**
* *Impact:* Subject to revised rules regarding Core SGF contributions and potential capped additional contributions in case of defaults. Non-defaulting members have the option to resign under specified conditions.
* *Action Required:* Understand the new rules, assess potential impact on their obligations, and consider the implications of the resignation option.
* **SEBI:**
* *Impact:* Oversees the implementation of the revised guidelines and has the authority to approve allocation of losses to layer 'VI' in case of shortfalls.
* *Action Required:* Monitor implementation through Monthly Development Reports and provide approval for loss allocation to layer 'VI' if required.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for the securities market in India.
Clearing Corporations: Entities responsible for clearing and settling transactions in the securities market.
Stock Exchanges: Organized marketplaces where securities are bought and sold.
International Financial Services Centre: Jurisdiction providing financial services to non-residents and residents, often with specific regulatory frameworks.
Risk Management Review Committee (RMRC): A committee within SEBI that reviews and advises on risk management practices.
Core Settlement Guarantee Fund (Core SGF): A fund used to guarantee the settlement of transactions in the event of a default by a clearing member.
Default Waterfall: A sequence of resources used to cover losses resulting from a clearing member's default.
Securities Contracts Regulation Act, 1956: An act of the Parliament of India that regulates securities contracts.
CIRCULAR
SEBI/HO/MRD2/DCAP/CIR/P/2020/01 January 03, 2020
To
All recognised Stock Exchanges and Clearing Corporations except Stock Exchanges and
Clearing Corporations in International Financial Services Centre
Dear Sir/ Madam
Contribution by a non-defaulting member in the Default waterfall of Clearing
Corporations
SEBI vide its Circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014 has, inter
alia, specified guidelines pertaining to Core Settlement Guarantee Fund and Default
Waterfall for Clearing Corporations.
2. Pursuant to deliberations with Risk Management Review Committee (RMRC) of SEBI
and various stakeholders, it has been decided to amend the following provisions of
the aforesaid Circular.
a. Clause 14 of the said Circular dated August 27, 2014 shall stand modified as
under:
“Further Contribution to/ Recoupment of Core SGF
14) Requisite contributions to Core SGF by various contributors (as per clauses 7
and 8) 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.
Page 1 of 3In case there is failure on part of some contributor(s) to replenish its (their)
contribution, same shall be immediately met, on a temporary basis during the
month, in the following order:
(i) By CC
(ii) By SE”
b. Layer VII of the default waterfall, as specified under clause 16 of the said Circular
dated August 27, 2014, shall stand modified as under:
“VII. Capped additional contribution by non-defaulting members of the
segment. **
**
(i) CC shall call for the capped additional contribution 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 CC to market participants.
(ii) CCs shall have relevant regulations/provisions for non-defaulting
members to resign un-conditionally within the abovementioned period of
30 calendar days, subject to member closing out/settling any outstanding
positions, paying the capped additional contribution and any outstanding
dues to SEBI. No further contribution shall be called from such resigned
members.
(iii) The maximum capped additional contribution by non-defaulting members
shall be lower of 2 times of their primary contribution to Core SGF or 10%
of the Core SGF of the segment on the date of default in case of equity/
debt segments.
(iv) The maximum capped additional contribution by non-defaulting members
shall be lower of 2 times of their primary contribution to Core SGF or 20%
of the Core SGF of the segment on the date of default in case of
derivatives segment.
(v) In case of shortfall in recovery of assessed amounts from non-defaulting
members, further loss can be allocated to layer 'VI' with approval of SEBI.”
Page 2 of 33. Clearing Corporations are directed to:
(i) put in place the adequate systems and issue the necessary guidelines for
implementing the above decision.
(ii) make necessary amendments to the relevant bye-laws, rules and regulations for
the implementation of the above decision.
(iii) bring the provisions of this circular to the notice of the trading members / clearing
members / custodians and also to disseminate the same on the website.
(iv) communicate to SEBI the status of implementation of the provisions of this
circular through Monthly Development Report.
4. This circular is issued in exercise of the powers conferred under Section 11(1)
of the Securities and Exchange Board of India Act 1992, read with Section 10
of the Securities Contracts (Regulation) Act, 1956 to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
5. This circular is available on SEBI website at www.sebi.gov.in at “Legal
Framework→Circulars”.
Yours faithfully,
Amit Tandon
General Manager
Market Regulation Department
E-mail: amitt@sebi.gov.in
Page 3 of 3