The Securities and Exchange Board of India on Thursday announced fresh guidelines for contributions by various entities towards the core settlement guarantee fund of Limited Purpose Clearing Corporation.
A core settlement guarantee fund serves as a financial safeguard for trade settlements in case of defaults, with contributions coming from stock exchanges, clearing corporations, and brokers.
LPCC is an entity established to undertake the activity of clearing and settlement of repo transactions. A well-functioning repo market contributes to the development of the debt securities market by boosting liquidity.
In its circular, SEBI said the contribution of participants who desire direct participation and not through a clearing member to the core settlement guarantee fund is risk-based and equivalent to a deficit in the minimum required corpus post-contribution by issuers and clearing members. Such contributions by participants should be subject to certain conditions.
These include exposure-free collateral of participants available with clearing corporations that can be considered towards the core SGF contribution of participants, and the required contributions of individual participants will be pro-rata based on the risk they bring to the system.
SEBI said the LPCC will have flexibility to collect the participant's primary contribution, including flexibility to either collect the participant's primary contribution upfront or staggered over a period of time.
In the event that LPCC doesn't seek contributions from participants or seeks staggered contributions, the remaining balance will be met by LPCC to ensure the adequacy of the total core SGF corpus at all times. Such LPCC contributions will be available to LPCC for withdrawal as and when further contributions from participants are collected or received.
In the event of usage of core SGF during a calendar month, SEBI said contributors will, as per usage of their individual contribution, immediately replenish the core SGF to the minimum required corpus.
However, such contributions towards replenishment of Core SGF by the members or participants would be restricted to only once during 30 calendar days, regardless of the number of defaults during the period. The period of 30 calendar days should commence from the date of notice of default by LPCC to market participants.
The regulator has prescribed guidelines for the default waterfall of LPCC.
A default waterfall is a system in which a clearing corporation applies different types of financial resources to meet a default loss, such as margins brought in by defaulting participants, clearing funds and its own assets.
(With inputs from PTI)
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