Circular on acceptance of Foreign Sovereign Securities as collateral from Foreign Institutional Investors (FIIs) for Exchange Traded Derivative Transactions
Summary
This circular permits Foreign Institutional Investors to deposit foreign sovereign securities with AAA ratings as collateral for exchange-traded derivative transactions. It mandates that clearing members and corporations implement specific safeguards, including written agreements and liquidation rights, to manage these non-cash assets. The valuation of such collateral is subject to haircuts and daily conversion to rupees using the RBI reference rate.
Text
Under existing guidelines, at least 50% of liquid assets for collateral purposes shall be in the form of cash or cash equivalents.
RBI has permitted clearing corporations and members to open demat accounts with foreign depositories to acquire, hold, pledge, transfer, remit proceeds from, and liquidate foreign sovereign securities offered as collateral by FIIs.
Clearing members are permitted to accept foreign sovereign securities with ‘AAA’ rating as collateral from FII clients subject to necessary safeguards.
Before accepting sovereign securities, the clearing member shall enter into a written agreement with the FII and clearing corporation containing terms on jurisdiction/arbitration and liquidation rights upon default.
The clearing member shall take due care to ensure that the sovereign securities tendered as collateral are available for liquidation in the event of insolvency of the FII or any intermediary located overseas.
The clearing corporation shall take due care to ensure that sovereign securities tendered as collateral are available for liquidation in the event of insolvency of the clearing member or any intermediary located overseas.
The clearing corporation shall take adequate care to ensure that the sovereign securities accepted as margin are tendered under a mechanism which does not unduly hinder timely liquidation in the event of default by the clearing member.
The clearing corporation shall value the collateral applying due haircuts (fixed percentage or VaR based), using market-determined prices converted to rupee terms daily using the RBI Reference rate.
The RBI reference rate used for conversion shall be disclosed by the clearing corporation to the clearing members to enable them to report the value of margins collected from FIIs.
Sovereign securities tendered as collateral shall be treated as part of the cash component of liquid assets, provided their value does not exceed 10% of the total value of the cash component of the clearing member's liquid assets.
The existing procedure for acceptance and release of collateral tendered by domestic investors shall be adopted mutatis mutandis for sovereign securities tendered by FIIs.
This circular is issued in exercise of powers conferred by sub-section (1) of Section 11 of the Securities and Exchange Board of India Act, 1992.
Source: SecMarx — Circular on acceptance of Foreign Sovereign Securities as collateral from Foreign Institutional Investors (FIIs) for Exchange Traded Derivative Transactions. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.