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The Securities and Exchange Board of India has asked that financial market infrastructure institutions such as clearing corporations and depositories adopt certain international principles designed to help withstand financial shocks including building up sufficient financial resources to withstand defaults.
A clearing corporation acts as the counterparty to all trades executed on an exchange while a depository is the keeper of the securities traded on it.
The principles include one that would require them to maintain sufficient financial resources to handle defaults from more than two participants.
“In addition, a CCP(Central Counterparty or clearing corporation) that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates,” said the Sebi circular.
The Committee on Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) came up with the principles which cover credit and liquidity risk management, settlement and management of defaults.
It also looks to provide a legal basis for such institutions which would allow it to carry out its activities unhindered. A Sebi official had previously told Business Standard that the regulator is looking to protect clearing corporations from court orders which may interfere with their functioning.
Sebi has said that all institutions would be monitored on a periodic basis for compliance with the principles.
