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TMI BlogSegregation and Monitoring of Collateral at Client LevelX X X X Extracts X X X X X X X X Extracts X X X X ..... gation and monitoring of collateral at client level. 3. In light of the public comments and discussions with the stakeholders, it has been decided to adopt the following framework for segregation and monitoring of collateral at client level. Reporting Mechanism by TMs and CMs 4. With a view to providing visibility of client-wise collateral (for each client) at all levels, viz., TM, CM and Clearing Corporation (CC), a reporting mechanism, covering both cash and non-cash collateral, shall be specified by the CCs. Details in respect of the same are as under: a. The reporting structure shall entail disaggregated information (segment-wise and asset type wise break-up) of each client collateral in the following manner: TM shall report disaggregated information on collaterals up to the level of its clients to the CM. CM shall report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the Stock Exchanges (SEs) and CCs in respect of each segment. b. The details to be submitted in the report shall essentially cover the following information, in order to provide a holistic view of the entire client col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. In case of such collateral received by the CM from any TM, the CM shall not accept the same without the TM specifying break-up of such collateral into proprietary account of the TM and/or uniquely identified client account. Similarly, the CC shall not accept such collateral without the CM specifying appropriate break-up of such collateral into proprietary account of CM/ proprietary account of TM/ client account. The CM shall ensure that the sum of break-up of such collateral provided by TM is equal to the total value of such collateral provided by TM, and that the allocation of such collateral to any entity as reported to the CC does not exceed the allocation of collateral reported by the TM for that entity. 11. The amount of collateral allocated shall not exceed the amount of collateral received by the TM/CM from the client and reported as such under the reporting mechanism (refer Para 4), excluding the securities collateral re-pledged to CC through margin pledge mechanism. Further, the sum of client collateral retained by the TM/CM and client collateral passed on to CM/CC shall equal the amount of collateral received by the TM/CM from the client. Also, the allocation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral allocated by the CM shall be made available on a daily basis on the web portal facility to clients to view disaggregated collateral reporting by TM/CM (refer Para 5). Further, CC shall also provide a facility to the TMs of the clients to view such collateral allocation to the clients by the CM. Collateral Valuation 18. CMs are required to maintain at least 50% of the total collateral in the form of cash or cash equivalents. At individual client level, a client may have allocation of cash equivalent, less than the value of non-cash collateral provided by the client. In other words, the minimum 50% cash equivalent collateral requirement may not be applied at the client level. For the purpose of monitoring of at least 50% cash-equivalent collateral at the level of CM, the excess cash-equivalent collateral of a client shall not be considered for other client or for proprietary account of TM/CM. However, the excess cash-equivalent collateral of proprietary account of TM/CM can be considered for clients trading/clearing through them, for the purpose of monitoring minimum 50% cash-equivalent requirement. 19. An illustration of the above requirement is provided at Annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roprietary collateral shall be calculated as TM margin in excess of 90% of TM collateral. Sum of such margin for each TM clearing through a CM, plus sum of client margin in excess of 90% of the client collateral for each client clearing through such CM, plus the proprietary CM margin shall be assessed against the proprietary CM collateral for monitoring of CM level risk reduction mode. 27. An illustration for monitoring of risk reduction mode is provided at Annexure-5 . 28. In case of CP trades executed by TMs, the margin shall be blocked in the following order- (i) CP collateral through the executing TM, if any, (ii) residual margin from the proprietary collateral of the executing TM, and (iii) residual margin from the proprietary collateral of the CM of the executing TM. Upon confirmation of such trades by CM of the CP, the margin so blocked prior to the confirmation shall be released, and shall be blocked in the following order- (i) CP collateral through the confirming CM, and (ii) residual margin from the proprietary collateral of the confirming CM. In case of CP trades, the requirement to ensure that sufficient collateral is allocated to clients to cover their margin re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial resources to complete settlement in a timely manner and complete the pay-outs to the non-defaulting members. Stage 2: Portability or immediate return of collateral 38. CC shall put in place a mechanism/ process for TMs/clients/CPs of defaulting CM to establish that they are not in default to the defaulting CM and have deposited collateral to the extent of allocation (including deemed allocation). This process shall be completed within a pre-specified time period. On identification of such non-defaulting TMs/clients/CPs, CC shall provide them opportunity for either porting of their positions and collateral to another CM or immediate return of their collateral. 39. Portability of Positions and Collateral: a. Entities desirous of availing the facility of portability shall be required to have established alternative trading/clearing arrangements with other TMs/CMs other than the defaulting CM. b. If any pay-out is due to such entities, such pay-out shall be made to the entities. As a result, the amount of such pay-out shall be added to the pay-in shortfall of the defaulting CM. 40. Immediate return of collateral: a. Collateral of such entities shall only be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of funds/securities payable for the proprietary trades. Any shortage in the proprietary collateral of the defaulting CM shall be met by applying the default waterfall of the CC. Any excess proprietary collateral of the CM shall also be used for meeting the defaulted obligations. iii. Remaining defaulted obligations shall be attributed pro-rata: funds pay-in shortfall shall be attributed pro-rata among TM/clients/CP having funds payable and securities pay-in shortfall shall be attributed pro-rata among TM/clients/CP having deliverable positions in the security. Such losses shall be recovered from the collateral of the TM/clients/CP available, if any. Any shortage in the collateral of such TM/clients/CP shall be met by applying the default waterfall of the CC. iv. In case of any defaulted obligations attributed to a TM in Para (iii) above (and in turn to its clients), the process enunciated above at Para (ii) and (iii) above for a defaulting CM and its constituents shall apply, mutatis mutandis, to the TM. e. The aforesaid pro-rata attribution of shortages shall be provisional. The actual attribution of shortages to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defaulter member as per the existing provisions. Further, eligible clients will also have the access to compensation from the Investor Protection Fund, as per the existing provisions. 45. Illustration on procedures to be followed in Stage-4 are provided at Annexure-8. Default of TMs to CMs 46. The following procedure shall be adopted in case of default of TM to CM: a. The CM shall continue to meet its obligations towards its other constituents, as well as the CC. b. The CM shall close-out all open positions of the defaulting TM (including clients under the TM). c. Under the supervision of the CC, the CM shall appropriate the collateral towards losses. The losses in closing-out open positions and the settlement obligations due from clients of the TM shall be appropriated first from the allocated collateral (as per allocation provided by TM to CM, including deemed allocated) and securities collateral provided through margin pledge/ re-pledge to the level of CM/CC of respective clients. Any residual losses as well as the losses in closing-out open positions and the settlement obligations of the TM proprietary account shall be appropriated from the TM proprietary c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at www.sebi.gov.in at Legal Framework Circulars . Yours faithfully (Sudeep Mishra) General Manager Market Regulation Department email: [email protected] Annexure-1: Allocation of collateral Illustration 1 : Consider a self-clearing member (SCM) who has received the following cash collateral from its clients: Client Cash Received (Rs) Client-1 2 crore Client-2 3 crore Client-3 1 crore Client-4 1 crore Total 7 crore The member places ₹ 6 crore with the CC ₹ 4 crore out of client funds and ₹ 2 crore out of proprietary funds. ₹ 3 crore worth of client collateral is maintained in the specified client bank account of the member. Few illustrations of allocations and whether permitted or not are provided below: Sl. Allocation Comments 1 Prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h collateral cannot exceed the actual collateral received from the client Client-3 1Cr Client-4 1Cr Illustration 2 : Suppose a SCM receives the following collateral from clients: Client Collateral Type Value (Rs) Client-1 Cash 1 crore Client-2 Approved securities 2 crore Client-2 Non-approved securities 2 crore The member re-pledges the approved securities to the CC. The non-approved securities cannot be provided to the CC. The member provides ₹ 1 crore cash collateral of Client- 1 and ₹ 5 crore proprietary cash collateral to the CC. The member may allocate the collateral as follows: Client Value (Rs) Client-1 1 crore Proprietary 5 crore Thus, only the collateral provided to the CC (excluding securities pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 10 60 0 TM-1 Cli-3 70 100 0 30 TM-2 Prop 300 200 100 0 TM-2 Cli-4 70 90 0 20 TM-2 Cli-5 50 100 0 50 Considering TM-1, the excess cash-equivalent collateral of TM-1 Cli-2 cannot be used to offset the excess non-cash collateral of TM-1 Cli-1 and TM-1 Cli-3. Therefore, there will be excess non-cash collateral to the extent of 80 (50 for Cli-1 and 30 for Cli-3) under TM- 1. Considering TM-2, the excess proprietary cash-equivalent collateral of TM-2 can be used to offset the excess non-cash collateral of TM-2 Cli-4 and TM-2 Cli-5. Therefore, there will be no excess noncash collateral under TM-2. Summary of excess cash-equivalent and excess non-cash collateral under CM prop, TM- 1 and TM-2 would be as under: Entity Excess Cash-eq Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: Entity Collateral (Rs) Blocking (Rs) CMTM Prop 1000 0 TM-1 Prop 500 300 TM-1 Cli-1 300 300 TM-1 Cli-2 300 100 Trade-3: TM-1 Cli-2 trades with revised margin requirement for Cli-2 of ₹ 600. Blocking of margin shall be as follows: Entity Collateral (Rs) Blocking (Rs) CMTM Prop 1000 100 TM-1 Prop 500 500 TM-1 Cli-1 300 300 TM-1 Cli-2 300 300 Trade-4: TM-1 Cli-2 trades with revised margin requirement for Cli-2 of ₹ 900. Blocking of margin shall be as follows: Entity Collateral (Rs) Blocking (Rs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 380 20 CM-1 TM-2 Prop 500 200 - CM-1 TM-2 Client-4 1000 920 20 CM-1 TM-2 Client-5 1000 880 0 TM level monitoring In the above table, CliMrgn 90% , or client margin in excess of 90%, has been calculated as margin for the client less 90% of the client collateral. Risk reduction mode monitoring for TM shall be based on assessment of [TM Prop Margin + CliMrgn 90%] against the [TM Prop collateral]. Accordingly, margin utilization percentage of TM1 and TM2 would be as under: Margin utilization percentage of TM1 = [400 + (60 + 0 + 20)] /500 = 96% Margin utilization percentage of TM2 = [200 + (20 + 0)] /500 = 44% In other words, for TM1, margin of ₹ 30 is in excess of 90% of its prop collateral, while there is no excess margin for TM2 against its prop collateral. The same has been tabulated below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 150 Cli-2 50 Change in allocation: Example 2 The member shall not be permitted to change the allocation as follows (i.e. the member chooses to consider the cash retained with it to be as ₹ 100 belonging to each client): Entity Collateral (Rs) CM Prop 200 Cli-1 100 Cli-2 100 This allocation shall not be permitted since Cli-1 has a margin requirement of ₹ 150. Annexure-7: Procedures to be followed in Stage-2 and Stage-3 Consider an example of a SCM defaulting in the derivatives segment. An illustration of the cash settlement obligations of prop/clients and attribution of shortage is provided below (the available collateral shown against different entities comprises of both allocated collateral (including deemed allocated) and value of demat securities collateral provided through margin pledge/re-pledge to the level of CC): Entity (Pay-in)/ Pay-out (Rs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (₹ 2 crore), shall be provided to the Client-3. The settlement shortfall would now be ₹ 7 crore (₹ 5 crore shortfall in net pay- in, plus ₹ 2 crore of pay-out made to Client-3). The settlement shortfall of ₹ 7 crore shall be first adjusted with the SCM proprietary pay-in obligation of ₹ 3 crore. Excess remaining proprietary collateral of SCM (₹ 3 crore) shall also be used towards the settlement shortfall. Remaining settlement shortfall of ₹ 1 crore shall be attributed pro-rata to clients having pay-in, i.e., settlement shortfall of ₹ 0.5 crore each shall be attributed to Client-1 and Client-2 and appropriated from their collateral. Scenario 3: One pay-out client and one pay-in client establish not being in default Suppose Client-1 and Client-3 establish within the pre-specified time period of not being in default, not having debit balance/dues towards the member and not having received the pay-out due, where applicable. The remaining collateral of Client-1 and Client-3 (₹ 7 crore and ₹ 13 crore respectively) shall be provided to them. The pay-out due to Client-3 (₹ 2 crore) shall also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: Entity Findings Claim Client-1 Did not receive 150 payout Pay-out of 150 Return of collateral of 200 Client-2 Did not receive 150 payout Pay-out of 150 Return of collateral of 100 Client-3 Did not make any pay-in - Client-4 Did not make any pay-in - Client-5 Had made a pay-in of 300 Return of collateral of 300 Accordingly, the remaining collateral of defaulting clients shall be utilized to fulfil the claims of non-defaulting clients. The additional realization and claim settlement is tabulated below: Entity Additional utilization of collateral Claim Settled Client-1 - Pay-out of 150 Return of collateral of 200 Client-2 - Pay-out of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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