Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC)
Summary
This circular modifies existing SEBI regulations to establish specific risk management norms for Limited Purpose Clearing Corporations (LPCCs) handling debt securities. It mandates distinct contribution structures for the Core Settlement Guarantee Fund, including contributions from issuers, clearing members, and the LPCC itself. Additionally, it defines a detailed default waterfall sequence and imposes transparency requirements on the LPCC regarding its policies and implementation status.
Text
In order to enhance robustness of the risk management system in the clearing corporations, granular norms relating to core settlement guarantee fund, stress testing and default waterfall procedures have been prescribed by SEBI vide Circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014.
Based on consultation with various stakeholders, SEBI notified the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2020, (SECC Amendment Regulations, 2020) on October 08, 2020, to permit setting up of a Limited Purpose Clearing Corporation for clearing and settlement of repo transactions in debt securities.
The contribution to the Fund as specified in regulation 37 shall be made by the recognized limited purpose clearing corporation, the clearing members and issuers of the debt securities, in the manner as may be specified by the Board from time to time.
Any shortfall in the Fund, shall be replenished by the recognized limited purpose clearing corporation to the threshold level as may be specified by the Board from time to time.
The utilization of profits and investments by recognized limited purpose clearing corporations shall be in accordance with the norms specified by the Board: Provided that for the first five years from the date of grant of recognition by the board, there shall be no distribution of dividend to the shareholders and the profits of recognized limited purpose clearing corporation shall be transferred to the Fund specified in regulation 37.
Contribution of Issuers of Debt securities to Core SGF shall be equivalent to 0.5 basis points of the issuance value of debt securities per annum based on the maturity of debt securities, to be collected upfront, in the manner specified by the Board.
CMs contribution to Core SGF shall be risk based and equivalent to deficit in MRC post contribution by Issuers... required contributions of individual CMs shall be pro-rata based on the risk they bring to the system.
LPCC shall transfer profit to the Core SGF in terms of Regulation 22E(1) above, within 30 days of adoption of financial statements by the shareholders in the Annual General Meeting. LPCC’s contribution to core SGF shall be considered as part of its net worth.
In the event of usage of Core SGF during a calendar month, contributors shall, as per usage of their individual contribution, immediately replenish the Core SGF to MRC. However, such contribution towards replenishment of Core SGF by the members would be restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period.
The default waterfall of CC shall generally follow the following order – I. monies of defaulting member... II. Insurance, if any. III. Issuers contribution to Core SGF. IV. LPCC resources (equal to 5% of MRC). V. Core SGF... VI. Remaining LPCC resources (excluding INR 100 Crore)... VII. Remaining LPCC resources to the extent as approved by SEBI VIII. Capped additional contribution by non-defaulting members. IX. Any remaining loss to be covered by way of pro-rata haircut to payouts.
The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF on the date of default.
The contribution made by LPCC towards Core SGF, shall be considered for the purpose of computing capital requirements towards credit risk.
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Source: SecMarx — Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.