Executive Summary:
This SEBI circular, dated June 19, 2024, addresses contributions to the Core Settlement Guarantee Fund (SGF) and the default waterfall for Limited Purpose Clearing Corporations (LPCCs). It follows the SEBI Master Circular of October 16, 2023, and the SECC Amendment Regulations of July 24, 2023. Clearing Corporations must amend bylaws, inform participants, and report implementation status to SEBI.
Key Points / Main Content:
Contribution to Core SGF of LPCC:
* Participants desiring direct participation in LPCC must contribute to Core SGF based on risk, equivalent to the deficit in Minimum Regulatory Capital (MRC) post contribution by Issuers and Clearing Members.
* No exposure is allowed on Core SGF contribution of any Participant.
* Exposure-free collateral can be considered towards Core SGF contribution.
* Individual Participant contributions are prorated based on the risk they introduce.
* LPCC has flexibility in collecting Participant primary contributions upfront or staggered.
* If LPCC doesn't seek or staggers contributions, it must cover the balance to ensure Core SGF adequacy, with the right to withdraw as Participant contributions are received.
* "Participant" is defined as in Regulation 10A(1) of the SEBI Stock Broker Regulations 1992.
Timelines for Contribution and Recoupment of Core SGF of LPCC:
* In case of Core SGF usage, contributors must immediately replenish it to MRC based on their individual contribution usage.
* Replenishment by members/participants is restricted to once in 30 days, starting from the date of default notice by the Clearing Corporation (CC).
Default Waterfall of LPCC:
* The default waterfall follows this order:
* Monies of defaulting member/Participants, including their primary contribution to Core SGF.
* Insurance (if any).
* Issuers contribution to Core SGF.
* LPCC resources equal to 5% of MRC.
* Core SGF: Penalties, previous financial years' profit transferred to Core SGF, remaining Core SGF (LPCC and non-defaulting members/Participants primary contribution on a pro rata basis), remaining profit of LPCC transferred to Core SGF.
* Remaining LPCC resources excluding the higher of INR 100 Crore or the capital requirement towards orderly winding down.
* Remaining LPCC resources as approved by SEBI.
* Capped additional contribution by non-defaulting members/Participants.
* Any remaining loss covered by pro-rata haircut to payouts.
* INR 100 Crore exclusion applies only if remaining LPCC resources exceed INR 100 Crore.
* LPCC can call for capped additional contribution only once in 30 days from the date of default notice.
* Non-defaulting members/Participants can resign unconditionally within 30 days, provided they close outstanding positions, pay capped additional contribution, and any dues to SEBI; no further contribution is required from resigned members/participants.
* Maximum capped additional contribution is the lower of 2 times their primary Core SGF contribution or 10% of the Core SGF on the default date.
* Shortfall in recovery can be allocated to layer 'VII' with SEBI approval.
* Haircut to payouts requires prior SEBI approval for subsequent fund usage.
* Exit by CC post this layer usage is as per SEBI-decided terms.
Implementation:
* Clearing Corporations must amend bylaws, rules, and regulations immediately.
* Clearing Corporations must inform Participants/CMs and disseminate information on their website.
* Clearing Corporations must communicate implementation status in the Monthly Development Report to SEBI.
Impact Analysis:
Clearing Corporations:
* Impact: Required to implement changes to by-laws, rules, and regulations. Responsible for calculating and collecting contributions to Core SGF. Must manage the default waterfall according to the revised guidelines.
* Action Required: Amend bylaws, rules, and regulations, inform Participants/CMs, disseminate information on website, and report implementation status to SEBI in the Monthly Development Report.
Participants desiring direct participation and Clearing Members of LPCC:
* Impact: Subject to new rules regarding contributions to the Core SGF, replenishment timelines, and default waterfall procedures. Participants may need to contribute to the Core SGF.
* Action Required: Understand the new contribution requirements, potential liabilities, and the conditions for resignation in case of capped additional contributions.
Issuers:
* Impact: Contribution to Core SGF may be impacted.
* Action Required: Monitor changes to contribution requirements.
SEBI:
* Impact: Responsible for overseeing the implementation of the circular and approving certain actions related to the default waterfall.
* Action Required: Review Monthly Development Reports and any requests for approval related to the default waterfall.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body for securities markets in India, responsible for protecting investors' interests.
Clearing Corporations: Organizations that manage and guarantee the settlement of financial transactions, ensuring the integrity of the market.
Limited Purpose Clearing Corporation (LPCC): A specialized clearing corporation with a limited scope of operations, such as clearing transactions in triparty repo for corporate bonds.
Core Settlement Guarantee Fund (Core SGF): A fund established to cover losses arising from defaults by clearing members or participants, ensuring the stability of the clearing system.
Default Waterfall: The sequence in which resources are used to cover losses resulting from a member's default.
Securities Contracts Regulation Stock Exchanges and Clearing Corporations Second Amendment Regulations, 2023 (SECC Amendment Regulations, 2023): Regulations amended by SEBI to enable direct participation by participants in the LPCC for transacting in triparty repo for corporate bonds.
SEBI Master circular for Stock Exchanges and Clearing Corporations: A comprehensive document issued by SEBI providing guidelines and regulations for stock exchanges and clearing corporations.
Securities and Exchange Board of India Act, 1992: The act of parliament that established the Securities and Exchange Board of India (SEBI) and gave it statutory powers.
CIRCULAR
SEBI/HO/MRD/MRD-PoD-2/P/CIR/2024/83 June 19, 2024
To
All recognised Clearing Corporations
Dear Sir/ Madam,
Sub: Contribution to Core Settlement Guarantee Fund and Default Waterfall for
Limited Purpose Clearing Corporation (LPCC)
1. Para 6.5, 6.8 and Para 6.11 of Chapter 3 (Settlements) of the SEBI Master
circular for Stock Exchanges and Clearing Corporations dated October 16,
2023 prescribe guidelines to the contributions by various contributors to Core
SGF of Limited Purpose Clearing Corporation (“LPCC”) and Default waterfall of
LPCC respectively.
2. Based on consultations with various stakeholders, SEBI notified the Securities
Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Second
Amendment) Regulations, 2023 (SECC Amendment Regulations, 2023) on
July 24, 2023 to enable direct participation by participants in the LPCC for
transacting in tri-party repo for corporate bonds. Accordingly, following Para
(6.5.1.4) shall be included and Para 6.8.2 and 6.11.1 shall be revised and read
as follows:
6.5. Contribution to Core SGF of Limited Purpose Clearing Corporation
6.5.1.4. Participants contribution:
Contribution of Participants who desire direct participation and not through a
clearing member to Core SGF shall be risk based and equivalent to deficit in
MRC post contribution by Issuers and Clearing Members. The said
contribution by Participants shall be subject to the following conditions:
that no exposure shall be available on Core SGF contribution of any
Participant (exposure-free collateral of participants available with CC can
be considered towards Core SGF contribution of Participants), and that
required contributions of individual Participants shall be pro-rata based on
the risk they bring to the system.
LPCC shall have the flexibility to collect Participant primary contribution,
including flexibility to either collect the Participant primary contribution
upfront or staggered over a period of time. In case LPCC does not seekcontribution from Participants or seeks staggered contribution, the remaining
balance shall be met by LPCC to ensure adequacy of total Core SGF corpus
at all times. Such LPCC contribution shall be available to LPCC for
withdrawal as and when further contributions from Participants are collected
/ received.
The term ‘Participant’ would be construed as defined in the Regulation 10A
(1) of the SEBI (Stock Broker) Regulations 1992.
6.8. Timelines for contribution to and recoupment of Core SGF of LPCC
6.8.2. 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 / [Participants] 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 CC to market participants.
6.11. Default waterfall of LPCC
6.11.1. The default waterfall of CC shall generally follow the following order:
a. Monies of defaulting member / [Participants] (including defaulting
member’s/ [Participant’s] primary contribution to Core SGF).
b. Insurance, if any.
c. Issuers contribution to Core SGF.
d. LPCC resources (equal to 5% of MRC).
e. Core SGF in the following order:
i. Penalties
ii. Previous financial years profit of LPCC transferred to Core SGF
iii. Remaining Core SGF: LPCC contribution and non-defaulting
members’ / [Participant’s] primary contribution to Core SGF on pro-
rata basis.
iv. Remaining profit of LPCC transferred to Core SGF
f. Remaining LPCC resources (excluding higher of INR 100 Crore or the
capital requirement towards orderly winding down of critical operations
and services).*
g. Remaining LPCC resources to the extent as approved by SEBIh. Capped additional contribution by non-defaulting members/
[Participants].**
i. Any remaining loss to be covered by way of pro-rata haircut to
payouts. ***
* INR 100 Crore to be excluded only when remaining LPCC resources
are more than INR 100 Crore.
** (i) LPCC 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 LPCC to market participants.
(ii) LPCC shall have relevant regulations/provisions for non-defaulting
members / [Participants] to resign un-conditionally within the
abovementioned period of 30 calendar days, subject to member /
[Participant] 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 and resigned members /
[Participants].
(iii) The maximum capped additional contribution by non-defaulting
members / [Participants] shall be lower of 2 times of their primary
contribution to Core SGF or 10% of the Core SGF on the date of
default.
(iv) In case of shortfall in recovery of assessed amounts from non-
defaulting members /[Participants], further loss can be allocated to
layer 'VII' with approval of SEBI.”
***In case loss allocation is effected through haircut to payouts, any
subsequent usage of funds shall be with prior SEBI approval. Further,
any exit by CC post using this layer shall be as per the terms decided
by SEBI in public interest.
3. The Clearing Corporations are accordingly advised to:
a. make necessary amendments to the relevant bye-laws, rules and
regulations for the implementation of the above decision immediately, as
may be necessary/applicable.b. bring the provisions of this circular to the notice of the Participants/ CMs of
the CC and to disseminate the same on their website.
c. communicate to SEBI the status of implementation of the provisions of this
circular in the Monthly Development Report.
i. This circular is being issued in exercise of powers conferred under
Section 11 (1) of the Securities and Exchange Board of India Act,
1992 to protect the interests of investors in securities market.
Yours faithfully,
Vishal Shukla
General Manager
Tel. No. 022-2644-9959
Email: vishals@sebi.gov.in