**Executive Summary:**
This SEBI circular outlines norms for Core Settlement Guarantee Fund (SGF), default waterfall, and stress testing for Limited Purpose Clearing Corporations (LPCCs). It modifies previous circulars to align with the SECC Amendment Regulations, 2020, permitting LPCCs for clearing and settling repo transactions in debt securities. LPCCs must implement the circular's provisions within three months of recognition and amend bylaws accordingly.
**Key Points / Main Content:**
* **Core Settlement Guarantee Fund (SGF) for LPCC:**
* **Issuer Contribution:** 0.5 basis points of debt securities issuance value per annum, collected upfront.
* **Clearing Member (CM) Contribution:** Risk-based, covering deficit in MRC post-issuer contribution; exposure-free collateral can be considered.
* **Clearing Corporation (LPCC) Contribution:** Transfer of profit to Core SGF per Regulation 22E1; additional contributions from own funds allowed.
* Contributions to Core SGF, except upfront contribution by Issuers and annual contribution of profits by LPCC, 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
* **Recoupment of Core SGF of LPCC**
* 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
* 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.
* In case there is failure on part of some contributors to replenish its their contribution, same shall be immediately met, on a temporary basis during the month, by LPCC.
* **Default Waterfall for LPCC:**
* Monies of defaulting member
* Insurance
* Issuers contribution to Core SGF.
* LPCC resources equal to 5% of MRC.
* Core SGF
* Remaining LPCC resources excluding INR 100 Crore.
* Remaining LPCC resources to the extent as approved by SEBI
* Capped additional contribution by nondefaulting members.
* Any remaining loss to be covered by way of prorata haircut to payouts.
* The maximum capped additional contribution by nondefaulting members shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF on the date of default.
* **Modifications to Previous Circulars:**
* Clauses 8, 14, and 16 of the Circular dated August 27, 2014, read with the Circular dated January 03, 2020, are not applicable to LPCCs.
* Clauses 3.1.1 and 3.1.2 of the Circular dated April 10, 2019, are not applicable to LPCCs.
* **LPCC Responsibilities:**
* Implement circular provisions, including amendments to bylaws, within three months of SEBI recognition.
* Communicate provisions to members and disseminate on website.
* Disclose on website: Core SGF composition policy, Core SGF investment policy, and default waterfall details.
**Impact Analysis:**
* **Recognized Clearing Corporations:**
* *Impact:* Must adhere to the revised norms for Core SGF, default waterfall, and risk management.
* *Action Required:* Amend bylaws, implement systems, notify members, and disclose required information on their website within three months of SEBI recognition.
* **Clearing Members:**
* *Impact:* Subject to new rules regarding contributions to the Core SGF and default waterfall.
* *Action Required:* Understand revised contribution requirements and potential capped additional contributions.
* **Issuers of Debt Securities:**
* *Impact:* Required to contribute to the Core SGF based on the issuance value of debt securities.
* *Action Required:* Make upfront contributions to the Core SGF.
* **SEBI:**
* *Impact:* Responsible for overseeing the implementation and compliance of these regulations.
* *Action Required:* Review the prescribed limits of contribution to Core SGF from time to time latest by end of 5 years from the date of grant of recognition to a LPCC, considering the prevailing market conditions. Approve further loss allocation to layer 'VII' in case of shortfall in recovery of assessed amounts from nondefaulting members. Approve any subsequent usage of funds and decide terms of exit by CC post using haircut to payouts in public interest.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body issuing the circular and responsible for protecting investors and regulating the securities market in India.
Core Settlement Guarantee Fund (Core SGF): A fund designed to cover losses arising from clearing member defaults.
Limited Purpose Clearing Corporation (LPCC): A clearing corporation specifically established for clearing and settlement of repo transactions in debt securities.
Default Waterfall: The order in which resources are used to cover losses resulting from a clearing member default.
Securities Contracts Regulation Stock Exchanges and Clearing Corporations Amendment Regulations, 2020 (SECC Amendment Regulations, 2020): Regulations amended to allow the establishment of Limited Purpose Clearing Corporations.
Central Government Securities: Securities issued by the central government that clearing members can contribute towards the Core Settlement Guarantee Fund.
Market Regulation Department: The department within SEBI responsible for issuing the circular.
Securities and Exchange Board of India Act, 1992: The act under which SEBI derives its power to issue the circular.
Securities and Exchange Board of India
CIRCULAR
SEBI/HO/MRD2/DCAP/CIR/P/2020/245 December 21, 2020
To
All recognized Clearing Corporations
Dear Sir / Madam,
Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited
Purpose Clearing Corporation (LPCC)
1) In order to enhance robustness of the risk management system in the clearing
corporations, granular norms relating to core settlement guarantee fund, stress
testing and default waterfall procedures have been prescribed by SEBI vide Circular
no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014. Further, vide Circular no.
CIR/MRD/DRMNP/33 /2017 dated April 26, 2017, 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.
Also, norms relating to contribution by a non-defaulting member in the Default
waterfall of Clearing Corporations were modified vide Circular No.
SEBI/HO/MRD2/DCAP/CIR/P/2020/01 dated January 03, 2020.
2) Further, vide Circular no. SEBI/HO/MRD/DRMNP/CIR/P/2019/55 dated April 10,
2019, granular norms related to computation of risk-based capital and net worth
requirements for Clearing Corporations were prescribed.
3) Based on consultation with various stakeholders, SEBI notified the Securities
Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment)
Regulations, 2020, (SECC Amendment Regulations, 2020) on October 08, 2020, to
permit setting up of a Limited Purpose Clearing Corporation for clearing and
settlement of repo transactions in debt securities.
4) Regulation 22D of the SECC Amendment Regulations, 2020, provides that
“(1). The contribution to the Fund as specified in regulation 37 shall be made by the
recognized limited purpose clearing corporation, the clearing members and issuers
of the debt securities, in the manner as may be specified by the Board from time to
time.
(2) Any shortfall in the Fund, shall be replenished by the recognized limited purpose
clearing corporation to the threshold level as may be specified by the Board from time
to time.”
Page 1 of 55) Regulation 22E (1) of the SECC Amendment Regulations, 2020, provides that
“(1) The utilization of profits and investments by recognized limited purpose clearing
corporations shall be in accordance with the norms specified by the Board:
Provided that for the first five years from the date of grant of recognition by the board,
there shall be no distribution of dividend to the shareholders and the profits of
recognized limited purpose clearing corporation shall be transferred to the Fund
specified in regulation 37.”
6) In view of the above, the abovementioned Circulars dated August 27, 2014 and
January 03, 2020 stand modified as under:
(i) After Clause 8 of the said Circular dated August 27, 2014, following Clause 8A
shall be inserted:
“Contribution to Core SGF of LPCC
8A) At any point of time, the contributions of various contributors to Core SGF
shall be as follows:
a. Issuer contribution: 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.
b. Clearing Member (CM) primary contribution:
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:
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), and
that required contributions of individual CMs shall be pro-rata based on the
risk they bring to the system.
LPCC shall have the flexibility to collect CM primary contribution, including
flexibility to either collect the CM primary contribution upfront or staggered over
a period of time. In case LPCC does not seek contribution from CM 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
CMs are collected / received.
c. Clearing Corporation contribution: 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.
Page 2 of 5The above prescribed limits of contribution may be reviewed by SEBI from
time to time (latest by end of 5 years from the date of grant of recognition to a
LPCC), considering the prevailing market conditions.
(ii) After Clause 14 of the said Circular dated August 27, 2014 read with Circular
dated January 03, 2020, following Clause 14A shall be inserted:
“Further contribution to / Recoupment of Core SGF of LPCC
14A) 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 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, by LPCC.
(iii) After Clause 16 of the said Circular dated August 27, 2014 read with Circular
dated January 03, 2020, following Clause 16A shall be inserted:
Default waterfall of LPCC
16A) The default waterfall of CC shall generally follow the following order –
I. monies of defaulting member (including defaulting member's primary
contribution to Core SGF.
II. Insurance, if any.
III. Issuers contribution to Core SGF.
IV. LPCC resources (equal to 5% of MRC).
V. 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’
primary contribution to Core SGF on pro-rata basis.
iv. Remaining profit of LPCC transferred to Core SGF
VI. Remaining LPCC resources (excluding INR 100 Crore).*
VII. Remaining LPCC resources to the extent as approved by SEBI
VIII. Capped additional contribution by non-defaulting members.**
IX. 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.
Page 3 of 5** (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
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 on the date of default.
(iv) In case of shortfall in recovery of assessed amounts from non-defaulting
members, 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.
7) Accordingly, Clauses 8, 14 and 16 of the said Circular dated August 27, 2014 read
with Circular dated January 03, 2020 shall not be applicable to LPCC. All other
provisions of the Circulars dated August 27, 2014, April 26, 2017 and January 03,
2020, including the aforesaid newly inserted clauses 8A, 14A and 16A, shall be
applicable to LPCC.
8) In view of the above, the abovementioned Circular dated April 10, 2019 stand
modified as under:
(i) Considering the contribution by issuer towards Core SGF of LPCC, after Clause
3.1.1 and 3.1.2 of the said Circular dated April 10, 2019, following Clause 3.1.1A
and 3.1.2A shall be inserted:
“3.1.1A The credit risk from default of clearing members is being captured through
the Core SGF framework as prescribed vide SEBI circular
CIR/MRD/DRMNP/25/2014 dated August 27, 2014 on “Core Settlement
Guarantee Fund, Default Waterfall and Stress Test.
“3.1.2A The contribution made by LPCC towards Core SGF, shall be considered
for the purpose of computing capital requirements towards credit risk.
9) Accordingly, Clauses 3.1.1 and 3.1.2 of the said Circular dated April 10, 2019 shall
not be applicable to LPCC. All other provisions of the said Circular dated April 10,
2019, including the aforesaid newly inserted clauses 3.1.1A and 3.1.2A shall be
applicable to LPCC.
10) The provisions of this Circular shall be effective from the date of grant of recognition
to LPCC by SEBI.
11) LPCC shall:
a) take necessary steps to put in place systems for implementation of the circular,
including necessary amendments to the relevant bye-laws, rules and regulations;
Page 4 of 5b) bring the provisions of this circular to the notice of their members and also
disseminate the same on its website;
c) make the following details available on its website:
i. Policy on composition and contributions to be made to the Core SGF of LPCC;
ii. Investment policy for Core SGF of LPCC;
iii. Default waterfall for segment along with the quantum of resources available in
each layer of default waterfall;
d) implement the provisions of this circular within three months from the date of
grant of recognition to LPCC by SEBI and communicate to SEBI the status of
implementation.
12) 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 and to promote the development of, and to regulate, the
securities market.
13) This circular is available on SEBI website at www.sebi.gov.in, under the category
"Circulars".
Yours faithfully,
Sudeep Mishra
General Manager
Market Regulation Department
+91-22-2644 9365
sudeepm@sebi.gov.in
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