Utilisation of the Settlement Guarantee Fund (SGF) - SEBI - SMDRP/POLICY /CIR -16/2001

SECURITIES AND EXCHANGE BOARD OF INDIA SECONDARY MARKET DEPARTMENT Mittal Court, B Wing, First Floor, 224, Nariman Point, Mumbai 400 021 SMDRP/POLICY /CIR -16/2001 March 9, 2001 The Executive Directors / Managing Directors, All Stock Exchanges Dear Sir, Sub: Utilisation of the Settlement Guarantee Fund (SGF) SEBI, vide its circular no. SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997 regarding guidelines for setting up Settlement Guarantee Fund(SGF) at Stock Exchanges, had prescribed that 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. However, it has now been decided that the Stock Exchanges may be allowed to utilise the SGF maintained by them for meeting the shortages arising out of non-fulfillment/partial fulfillment of the funds obligations by the members in a settlement before declaring the concerned member defaulter in the same manner as in the case of NSCCL. Towards this end, the bye-laws would be suitably amended and norms for utilisation of SGF would have to be prescribed. The bye-laws may be amended on the following lines. In the event a member fails to meet obligations to the Clearing House of the Exchange arising out of clearing and settlement operations of such deals as provided in the Bye-laws and Regulations, the relevant authority may utilise the Settlement Guarantee Fund and other monies to the extent necessary to fulfill the obligation under such terms and conditions as the relevant authority may specify from time to time. The following would be the norms for utilisation from SGF : Settlement Guarantee Fund maintained by the Exchange may be utilised for meeting the shortages arising out of non-fulfillment/partial fulfillment of the funds obligations by the members in a settlement before declaring the concerned member defaulter subject to the following: 1. In cases where amount shortages are in excess of the base minimum capital (BMC) prescribed, the trading facility of the member is withdrawn and the securities Pay-out due to the member is withheld. In cases where the amount of shortages exceed 20% of the BMC and is less than the BMC on six occasions within a period of three months, the trading facility of the member is withdrawn and the securities pay-out due to the member is withheld. On recovery of the complete shortages, the member is permitted to trade with a reduced gross exposure as mentioned in the table below : Cumulative Funds Shortage Exposure limit allowed (% of current exposure limit) 20% of BMC 50% of BMC 80% 50% of BMC 100% of BMC 60% This reduced gross exposure level is maintained for a period of four settlement. If the cumulative funds shortages for the next 4 settlements is less than 20% of BMC, the exposure limits shall be restored. The exposure limit may be restored if a member provides a cash deposit equivalent to his cumulative funds shortages as the 'funds shortage collateral' in his clearing account. Such deposit will be kept with the Exchange for a period of 4 settlements and will be released only if no further funds shortages are reported for the member in next 4 consecutive settlements. There is no exposure benefit nor any interest payment on this amount so deposited as 'funds shortage collateral'. Members may deposit the 'funds shortage collateral' by way of cash, FDR or Bank Guarantee. 2. The outstanding amount would carry a penal interest of not less than 0.09% per day. Yours faithfully, P. K. BINDLISH Dy. General Manager Secondary Markets, Depository, Research and Publication Department email: [email protected]