With an aim to enhance robustness of the risk management system in limited purpose clearing corporations, Sebi on Monday came out with norms relating to core settlement guarantee fund (SGF), stress testing and default waterfall procedure.
The limited purpose clearing corporation (LPCC) is an entity established to undertake the activity of clearing and settlement of repo transactions.
Sebi had come out with a framework for setting up LPCC in October, a move aimed at boosting repo trading in corporate bonds.
With regard to contribution to core Settlement Guarantee Fund (SGF), Sebi said contribution to the Fund will be made by the recognised limited purpose clearing corporation, the clearing members and issuers of the debt securities.
Any shortfall in the Fund, will be replenished by the recognised limited purpose clearing corporation to the threshold level as specified by Sebi, the regulator said in a circular.
"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," the regulator said.
While clearing member (CM) primary contribution will be risk based and equivalent to deficit in minimum required corpus post contribution by issuers. The contribution is subject to certain conditions.
LPCC would have the flexibility to collect clearing member's 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 would be met by such clearing corporation to ensure adequacy of total Core SGF corpus at all times.
On clearing corporation's contribution, Sebi said LPCC will transfer profit to the core SGF within 30 days of adoption of financial statements by the shareholders in the annual general meeting. It can make additional contribution to core SGF from its own funds. LPCC's contribution to core SGF will be considered as part of its net worth.
The prescribed limits of contribution would be reviewed by Sebi by end of five years from the date of recognition granted to a LPCC, considering the prevailing market conditions.
Sebi said that requisite contributions to core SGF by various contributors (except upfront contribution by issuers and annual contribution of profits by LPCC) for any month will be made by the contributors before start of the month.
In the event of usage of core SGF during a month, Sebi said the contributors will be, as per usage of their individual contribution, immediately replenish the core SGF to minimum required corpus.
However, such contribution towards replenishment of core SGF by the members would be restricted to only once during a period of 30 days regardless of the number of defaults during the period, it added.
If there is failure on part of some contributor to replenish its contribution, the same would be immediately met, on a temporary basis by LPCC.
In addition, the regulator has put in place for stress testing of limited purpose clearing corporation.
Also, the regulator has prescribed default waterfall procedure, whereby clearing corporation applies different types of its financial resources to meet a default loss, such as margins brought in by defaulting participant, clearing funds and its own assets.
In case of default, the first to be used would be the money of defaulting member including its primary contribution to core SGF. Then, the core corpus comprising of penalties, previous financial years profit of LPCC transferred to core SGF, remaining core SGF as well as LPCC resources and contribution of non-defaulting members would be used.
Sebi said such corporations need to call for the capped additional contribution only once a month regardless of the number of defaults during the period.
"The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to core SGF or 10 per cent of the core SGF of the segment on the date of default in case of equity or debt segments," Sebi said.