9911796707
TMI BlogCore Settlement Guarantee Fund, Default Waterfall and Stress TestX X X X Extracts X X X X X X X X Extracts X X X X ..... ablish and maintain a Fund by whatever name called, for each segment, to guarantee the settlement of trades executed in respective segment of a recognised stock exchange. (2). . . (3). . . (4). . . (5) In the event of a clearing member failing to honour his settlement obligations, the Fund shall be utilized to complete the settlement. (6) The corpus of the Fund shall be adequate to meet the settlement obligations arising on account of failure of clearing member(s). (7) The sufficiency of the corpus of the Fund shall be tested by way of periodic stress tests, in the manner specified by the Board. 3) In order to promote and sustain an efficient and robust global financial infrastructure, the Committee on Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) updated the standards applicable for systemically important financial market infrastructures (central counterparties, payment systems, trade repositories and securities settlement systems) with the Principles for Financial Market Infrastructures (PFMIs). SEBI as a member of IOSCO is committed to the adoption and implementation of the new CPSS-IOSCO standards of PFMIs. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (CC) shall have a fund called Core SGF for each segment of each Recognised Stock Exchange (SE) to guarantee the settlement of trades executed in respective segment of the SE. In the event of a clearing member (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. Corpus of Core SGF 6) The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member(s). The risk or liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members, the history of defaults, capital adequacy of the members, the degree of safety measures employed by the CC/SE etc. A fixed formula, therefore, cannot be prescribed to estimate the risk or liability of the fund. However, in order to assess the fair quantum of the corpus of Core SGF, CC should consider the following factors: * Risk management system in force * Current and projected volume/turnover to be cleared and settled by the CC on guaranteed basis * Track record of defaults of membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any CM (exposure-free collateral of CM available with CC can be considered towards Core SGF contribution of CM), and * that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system. CC shall have the flexibility to collect CM primary contribution either upfront or staggered over a period of time. In case of staggered contribution, the remaining balance shall be met by CC to ensure adequacy of total Core SGF corpus at all times. Such CC contribution shall be available to CC for withdrawal as and when further contributions from CMs are received. The above prescribed limits of contribution by CC, SE and CMs may be reviewed by SEBI from time to time considering the prevailing market conditions. 9) Any penalties levied by CC (as per Regulation 34 of SECC Regulations) shall be credited to Core SGF corpus. 10) Interest on cash contribution to Core SGF shall also accrue to the Core SGF and pro-rata attributed to the contributors in proportion to their cash contribution. 11) CC shall ordinarily accept cash collateral for Core SGF contribution. However, CC may accept CM contribution in the form of bank FDs too. CC shall adhere to specific g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other segments). II. Insurance, if any. III. CC resources (equal to 5% of the segment MRC). IV. Core SGF of the segment in the following order: i. Penalties ii. CC contribution to the extent of at least 25% of the segment MRC iii. Remaining Core SGF: CC contribution, Stock Exchange contribution and non-defaulting members' primary contribution to Core SGF on pro-rata basis. V. Proportion of remaining CC resources (excluding CC contribution to core SGFs of other segments and INR 100 Crore) equal to ratio of segment MRC to sum of MRCs of all segments.* VI. CC/SE contribution to Core SGFs of other segments (after meeting obligations of those segments) and remaining CC resources to that extent as approved by SEBI. VII. Capped additional contribution by non-defaulting members of the segment.** VIII. Any remaining loss to be covered by way of pro-rata haircut to payouts.*** * INR 100 Crore to be excluded only when remaining CC resources (excluding CC contribution to core SGFs of other segments) are more than INR 100 Crore. **CC shall limit the liability of non-defaulting members towards additional contribution to a multiple of their required primary contribution to Core SGF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt of at least two clearing members and their associates that would generate the largest aggregate liquidity obligation for the CC in extreme but plausible market conditions and compare such obligation with the resources mentioned hereunder: a) Cash b) Committed lines of credit available to CC 20) Reverse stress test: CC shall periodically carry out reverse stress tests designed to identify under which market conditions and under what scenarios the combination of its margins, Core SGF and other financial resources prove insufficient to meet its obligations (e.g. simultaneous default of top N members or N% movement in price of top 2 scrips by turnover or 20% movement in price of top N scrips by turnover etc.) 21) Back testing for adequacy of margins: CC shall daily conduct back testing of the margins collected vis-à-vis the actual price changes for the contracts being cleared and settled in every segment to assess appropriateness of its margining models. 22) Adequacy of financial resources: CC shall ensure that it maintains sufficient financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able on SEBI website at www.sebi.gov.in, under the category "Circulars". Yours faithfully, Shashi Kumar General Manager Division of Risk Management and New Products Market Regulation Department [email protected] Encl: as above Annexure Standard Stress Test Scenarios Day of Stress test -'S' day Cash Market Segment: Scenario 1: Default by 2 Brokers 1. CC shall compute the 'Cumulative Funds pay-in', 'Cumulative Funds pay-out', 'Cumulative Securities pay-in' and 'Cumulative Securities pay-out' of all members as on the end of pay-in deadline on the 'S' day. For this purpose cumulative payin/ payout of each member's trades (shall include non-institutional trades as well as 2X% by value of those institutional trades which have not yet been confirmed by the custodian) undertaken on 'S-2' day, 'S-1' day and on 'S' day till the pay-in deadline shall be considered. (X being the highest daily % by value of custodial rejects in the previous 12 months) 2. Any early pay-in of funds/securities shall be ignored. 3. It shall be assumed that each clearing member would default in meeting its 'cumulative funds pay-in' and 'cumulative securities pay-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. II. Funds pay-in obligation failure of the member: The assumed loss on liquidation of securities that would have been paid-out to the defaulting member shall be - a. Group 1 securities - 20% b. Group 2 & 3 securities - 20% scaled up by root of 3. III. Gross loss due to member = (Funds pay-in) + (120% of securities pay-in) -(funds pay-out) - (liquidation value of securities pay-out) 5. Coverage: Clearing corporation shall calculate the gross loss (as per 4 above) for each custodian and assess that against the defaulting custodians' required margins (In case of early pay-in, those margins which would have been applicable had the early pay-in was not made, to be considered. Excess collateral, if any, shall be ignored) and other mandatory deposits to find the credit exposure of CC towards each custodian. Equity scrips as collateral, if any, shall be valued with minimum 20% haircut. 6. Clearing Corporation shall calculate the total credit exposure due to default of the custodian (based on residual loss calculated in 5 above) causing highest credit exposure. Equity Derivatives and Currency Derivatives segments: The loss on closing out of client/proprietary positions s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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