Norms for acceptable collaterals and exposure of Clearing Corporations

SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/65 · 2024-05-29 · SEBI

Summary

This circular revises the norms for acceptable collaterals and exposure of Clearing Corporations to strengthen their risk management framework. It introduces specific haircuts for overnight mutual fund schemes and defines eligibility criteria for equity shares accepted as other liquid assets. Additionally, it modifies existing master circular provisions regarding liquid assets for both cash markets and commodity derivatives segments. This section establishes prudential norms for the exposure of Clearing Corporations (CCs) to manage risk and ensure operational resilience. It defines specific types of exposures, criteria for selecting banks, and strict limits on single bank and overall exposure. The text also outlines restrictions on collateral from related parties and provides a phased implementation timeline. This section establishes specific prudential norms for Clearing Corporations regarding fund deployment and exposure limits. It clarifies that these norms are minimum standards, allowing entities to adopt more conservative measures based on risk assessment. The circular also outlines applicability dates, implementation directives, and the legal authority under which it is issue

Text

Units of growth plan of overnight mutual fund schemes shall be accepted as Cash Equivalent by CCs with a haircut of 5% and for other plans of overnight mutual fund schemes the hair cut of 10% shall continue to be applicable.

Equity shares with impact cost of up to 0.1% for an order value of INR 1 lakh and traded for 99% of days over the period of previous 6 months shall be accepted as part of other liquid assets.

The acceptable liquid assets and the applicable haircuts are listed below: Item Haircut Limits Cash Equivalents Cash 0% No limit Bank Fixed Deposits (FDs) 0% No limit Bank Guarantees (BGs) 0% Limit on exposure to a single bank Securities of the Central Government See Note iii No limit Units of growth plans of overnight mutual fund schemes 5% No Limit Units of overnight mutual fund schemes (other than growth plans), liquid mutual fund schemes or government securities mutual fund schemes 10% No limit Other Liquid Assets Equity shares with impact cost of upto 0.1% for an order value of Rupees 1 lakh and traded for at least 99% of days over the period of previous 6 months VaR Margin based on 6σ, subject to minimum of 9%. Limit on exposure to a single issuer Units of mutual fund schemes other than those listed under cash equivalents VaR Margin based on 6σ, subject to minimum of 9%. No limit Corporate Bonds Fixed percentage based or VaR based haircut. A higher haircut may be considered to cover the expected time frame for liquidation. However, the haircut shall not be less than 10%. Not to exceed 10% of the total liquid assets of the CM.

The valuation of the liquid assets shall be done on a daily basis after applying applicable haircuts.

Haircut on securities of the Central Government: Treasury Bills, and Liquid Government of India Dated Securities 2% having residual maturity of less than 3 years. Liquid Government of India Dated Securities having residual maturity of more than 3 years 5%. For all other Semi-liquid and Illiquid Government of India Dated Securities 10%. The classification of the Government of India Dated Securities, as above, shall be reviewed on 15th of every month. The revision in classification, if any, shall be implemented with effect from 1st of the next month.

For Cash Markets, mark to market losses shall be paid by the member only in the form of cash or cash equivalents.

Cash equivalents shall be at least 50% of liquid assets. This would imply that Other Liquid Assets in excess of the total Cash Equivalents would not be regarded as part of Total Liquid Assets.

In view of paragraphs 4 and 5 above, the provisions for “liquid assets” such as cash, bank guarantee, FDs, central govt. securities, units of overnight mutual funds, liquid mutual funds, money market mutual funds, govt. securities mutual funds and securities as specified under Chapter 5 of Master Circular dated October 16, 2023 for Stock Exchanges and Clearing Corporations, for risk management of various derivatives segment, shall stand modified.

Further, in view of paragraphs 4 and 5 above, paragraph 9.1.2 of Chapter 9 of SEBI Master Circular dated August 04, 2023 for Commodity Derivatives Segment shall stand modified. Provisions with regard to Bullion, Gold ETF, Agriculture Commodities, Base Metals & Alloys and Diamond as part of Other Liquid Assets, for Commodities Derivatives Segment, shall remain unchanged.

CCs shall consider CCs’ own funds, Core SGF corpus, exposure through members/warehouse service providers, and subsidiaries in monitoring exposure.

CCs shall devise well-defined criteria for selection of banks based on financials, capital adequacy, and credit worthiness.

Banks must have minimum net worth of INR 5,000 Cr, unsupported long-term rating of AA and above, meet RBI capital adequacy requirements, and not be under PCA Framework.

Source: SecMarx — Norms for acceptable collaterals and exposure of Clearing Corporations. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.