Sebi tweaks Settlement Guarantee Fund norms

Mandates daily stress tests, reviews defaults procedures

In a revamp of risk management in the stock market, the Securities and Exchange Board of India (Sebi) has mandated creation of a ‘core’ amount within the existing Settlement Guarantee Fund (SGF) and stress testing to detect risks.

An SGF, set up through levies on brokers, is used in the event of a default to meet settlement obligations.

“In the event of a clearing member failing to honour settlement commitments, the core SGF shall be used to fulfill the obligations of that member and complete the settlement without affecting the normal settlement process,” Sebi has now said.

The regulator has also asked clearing corporations to conduct daily stress tests to assess risk due to likely defaults by institutional trades. This will also help determine the corpus needed for core funds. The test framework prescribed by Sebi will be in line with international standards.

In doing these tests, clearing corporations will have to devise scenarios for a variety of ‘extreme but plausible market conditions’. These would include peak price volatility and multiple defaults by a single member, said Sebi.

The new norms are also intended to ring-fence each segment of a clearing corporation from defaults in other segments. The exchanges will be required to contribute 25 per cent of their total assets towards the core fund, while 50 per cent will be contributed by the Clearing Corporation. Clearing members cannot contribute more than 25 per cent of the total fund size, said Sebi.

The exchanges and clearing corporations have been asked to set up the core fund by December 1.

At present, the initial capital maintained by brokers with exchanges as well as a smaller portion of trading turnover goes towards the SGF, with exchanges and Clearing Corporation contributing towards the fund.

The Bimal Jalan committee in 2010 recommended a portion of the stock exchange profit should go to the SGF but it wasn't made mandatory by the regulator.

Currently, the SGF at National Stock Exchange's and BSE's clearing corporations take contributions only from members on an ongoing basis.
NEW GUIDELINES

• Sebi mandates creation of a ‘core’ amount within the existing Settlement Guarantee Fund and stress testing to detect risks
• An SGF, set up through levies on brokers, is used in the event of a default to meet settlement obligations
• The regulator also asks clearing corporations to conduct daily stress tests to assess risk due to likely defaults by institutional trades
• The Bimal Jalan committee in 2010 recommended a portion of the stock exchange profit should go to the SGF but it wasn't made mandatory by the regulator