SECURITIES AND EXCHANGE BOARD OF INDIA
SECONDARY MARKET DEPARTMENT
Mittal Court, A Wing, Gr. Floor,
224, Nariman Point, Mumbai 400 021 

To,
The Managing Director/Executive Director
of All Stock Exchanges

 Dear Sir,

 Sub : Guidelines for Settlement Guarantee Fund (SGF) at Stock Exchanges.

In order to ensure timely completion of the settlement, SEBI has advised all the stock exchanges to set up clearing house/clearing corporation or settlement guarantee fund. The objective behind the establishment of clearing corporation/settlement guarantee fund is to ensure that there is no delay in settlement due to failure of any member to honour his commitment to the exchange on time. The failure of one member has cascading effects on others as well. SEBI has also prescribed the condition for the exchange expanding its trading terminals to the centers outside the city (where stock exchange is situated) that such exchanges should have the clearing corporation/settlement guarantee fund in place.

The objective of the Fund :-

The objective of the SGF is to guarantee settlement of all transactions of the members of the exchange inter-se through the stock exchange. In the event of a member failing to honour his settlement commitments, the SGF will undertake to fulfill the commitment of that member and will complete the settlement without affecting the normal settlement process. In the case of clearing corporation, all the trades are settled through the clearing corporation and clearing corporation becomes the counter party for all the trades. The clearing corporation also guarantees settlement of all trades.

It is therefore the choice of the stock exchange either to set up a clearing corporation and extend settlement guarantee or else take up the settlement of the trade through the clearing house and guarantee the trade by setting up SGF.

In order to maintain uniformity, the following criteria for corpus of the fund, contributio`n to the fund, and management of the fund, access to the fund, settlement of corpus may be considered.
 

Corpus of the fund

The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member/members. The risk/liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members, the history of defaults at the exchange, capital adequacy of the members, and the degree of surveillance and safety measures i.e. imposition of mark to market margins, trade restrictions etc., implemented by the exchange. A fixed formula, therefore, cannot be prescribed to estimate the risk/liability of the fund. However, in order to assess the fair quantum of the corpus of SGF, an assessment on the following factors prevailing at the particular Stock Exchange may be necessary.

1. Risk Management system in force at the Exchange

1.  
   1. The extent of implementation of various margins systems and the level of threshold limits.
   2. The percentage of margins (paid by the members) to their pay-in liabilities
   3. Control on off-market transactions
   4. Capital adequacy of members (Base minimum capital and the additional capital deposited with the Exchange)
   5. The effectiveness of the surveillance system at the Exchange.
   6. Minimum expenses limit fixed by the Exchange.

1. The track record of defaults of members (Gross amount of default and the net amount) in the last 10 years.

 

 

2. The track record of disciplinary action for financial defaults taken by the Exchange in the last 10 years

 

 

3. The settlement liability of the top 10 members ( settlement liability wise ) in the highest settlement in the last 1 year..

 

 

4. Implementation of suggestions made in the SEBI Inspection Reports by the Stock Exchange.

 

 

5. The projected volume of business and deliveries at the Exchange for the next three years.

A realistic assessment on the adequacy of the above factors relating to the particular Stock Exchange need to be made. In case of any deficiency / non-satisfactory level of performance of the Exchange, the expected level of risk/liability to the SGF will increase and accordingly it will require a higher level of corpus.

Further in order to assess the minimum level of corpus of SGF, the following norms may be considered.

1. It may be assumed that in a worst case, the top ten members (highest settlement in last one year settlement liability-wise) of the exchange would default simultaneously in a settlement.

 

 

2. It may be assumed that there will be a maximum loss of 20% in the value on the net basis in the process of reversing the trade or squaring off the position.

 

 
 
 
 

3. The loss may be assumed to be recovered from the following sources :

•  
  • Margins deposited with the Exchange.
  • The short fall will be first met from Income of the SGF (interest on deposits and recurring sources such as the turnover based contributions from members etc).
  • The, balance, shortfall, if any might be recovered from the corpus of SGF.

In the normal course, the total income from the interest earned on cash portions of the corpus of SGF and other recurring contributions to SGF by member should be adequate to take care of the unexpected liability as per (b) above, For example if the total loss on settlement liabilities of the top ten brokers is Rs 2 Crs in a particular settlement, income generation from the fund (including recurring income) should not be less than Rs 2 Crs p.a..

Contribution to the Fund :

The basic objective of the fund is to provide safety to the members against the risk of failure of any other member/s in the settlement, therefore the contribution to the corpus of SGF should be made by the members. The investor protection fund or any other fund earmarked for the benefit of investors should not be utilised for this purpose. The exchange may contribute towards the corpus of the fund out of the free reserves and by way of appropriation of the members fund lying with it. The base minimum capital contributed by the members may be used for building up the corpus of the SGF. At present, the base minimum capital is required to be contributed in the form of cash(25%), in the form of fixed deposit with a bank in the name of member(25%) and by way of securities(50%). The corpus of SGF should be most liquid like cash and the members may therefore be required to liquidate their fixed deposit with the bank towards base minimum capital and deposit the equivalent cash in the SGF. For better liquidity, it should be ensured that the securities accepted towards contribution to the base minimum capital consist of only NIFTY (NSE 50 Index) Scrips which are freely usable by SGF in meeting out any risk / liability. The members may also be required to contribute to the fund by way of bank guarantee revocable at the instance of SGF against the default by any member. In order to generate regular income to the fund, the members should pay turnover based contribution to this fund. This contribution made by the members should not be recovered from investors.
 
 

Management of the fund :

The management of the SGF should be in the hands of an independent committee represented by members and outsiders. The constitution of the committee should be approved by SEBI.

Access to the fund :

In the event of a failure of member/s to honour their settlement commitment, the SGF will fulfill the commitment only after declaring the member/s as defaulter/s and such member/s would not be eligible to continue to trade and default proceedings as per the bye-laws of the exchange would have to be initiated against him.

Recoupment of the corpus :

It should be ensured that the corpus of the SGF will not fall below the initial corpus or 75% of the closing value of the fund as on date immediately preceding March 31, which ever is higher and it will increase in proportion of increase in membership / turnover.

In addition to the above, SEBI may consider other aspects relating to the functioning of the Exchange, effectiveness of its trading and settlement systems, monitoring and

surveillance mechanisms and the standard of adherence by the stock exchanges/ members to the various circulars/instructions issued by Government/SEBI etc. while considering the proposals for setting up of SGF by the stock exchanges.

In order to facilitate submission of all the relevant information to SEBI for its examination and approval for the proposals for setting up SGF, the Exchanges may submit the information in the enclosed format (Annexure "A").
 
 

Yours faithfully,
 
 
 
 

O.P.GAHROTRA

SR.EXECUTIVE DIRECTOR

CLEARING CORPORATION / SETTLEMENT GUARANTEE FUND
 
 

1. Name of the Exchange

 

 

2. Status

 

 

3. The present system of clearing function

•  
  • Securities
  • Funds

1. Proposed mode of guaranteeing settlement

liabilities (separate clearing corporation/

settlement guarantee fund)
 
 

1. Whether SGF guarantees 100% settlement

liability
 
 

1. Risk Management at the Exchange

1.  
   1. Gross exposure limit
   
    

    

   2. Net exposure limit
   
    

    

   3. Implementation of various

margins systems
 
 

•  
  • Mark to Market Margin

•  
  • Gross/Net exposure limit

•  
  • Others, if any.

1.  
   1. Percentage of total margins

collected to the total pay-in

liability.
 
 

1.  
   1. Control on off market

transactions.
 
 

1.  
   1. Base minimum capital and

the additional capital.
 
 

1.  
   1. Effectiveness of

surveillance system.
 
 

1. Track record of defaults of

members in the last 10 yrs.
 
 

•  
  • Total No. of members defaulted
  • Gross amount of default
  • Net amount of default

1. Projected business at the

exchange for the next 3 yrs.
 
 

•  
  • Gross turnover (Rs. In crores)
  • Delivery percentage

1. Adequacy of corpus of SGF

1. Top ten members net settlement

liability to the exchange in the

highest settlement in the last one

year, with respect to fund securities

(before margins)
 
 

1. Margins collected from members

by the Exchange deposited by the

respective members with the Exchange.
 
 

1. Assumed loss (20% on a above

due to squarring up of the position

or reversing the trade.)
 
 

1. Expected risk.

 

 

2. Expected liability on corpus to

complete settlement
 
 8. The proposed corpus of SGF
 
 

•  
  • Cash Corpus

- Exchanges contribution from its free reserves.
 
 - members contribution

to SGF
 
 

•  
  • TOTAL

Non-cash corpus
 
 

•  
  • Members, members, Non

-cash contribution from base minimum capital (FDs

securities etc.)
 
 

* Bank Guarantees (specific access per member

Rs. 10 lakhs).

* Total corpus
 
 

1. Projected regular income to the fund

• Interest on deployment to the fund
• Turnover based recurring contribution

from the members.
 
 

• Others (Penalties etc.)

• Total projected annual income

10. Sufficiency of the annual regular income

of SGF to meet the likely liability of SGF

(as arrived at 7(d).
 
 

1. Management of the fund (separate

committee presented by members and

outsiders. It should be approved by SEBI)
 
 

1. Access to the fund (The member

should be declared a defaulter utilising

the fund to meet the liability)
 
 

1. Provision for reocupement of the Fund

• not less than the initial corpus or

75% of the value of the corpus as on

the immediate preceding March 31,

whichever is higher).
 
 

• corpus to be increased in proportion

to the increase in membership turnover;
 
 

1. Ensure that no funds earmarked

for the benefit of the investors are

used for the purpose of SGF.
 
 

1. The turnover based fee to be

collected from the members will not

be recovered from the investors.
 
 

1. Eligible securities to

qualify for deposits with the

exchange (NIFTY 50 scrips)