Contribution to Core Settlement Guarantee Fund and Default Waterfall for Limited Purpose Clearing Corporation (LPCC)
Summary
This circular amends the SEBI Master Circular to establish guidelines for contributions to the Core Settlement Guarantee Fund (CSGF) and the default waterfall for Limited Purpose Clearing Corporations (LPCC). It introduces risk-based participant contributions to the CSGF, allowing LPCCs flexibility in collection timing while ensuring fund adequacy. The document also revises timelines for CSGF replenishment and details a specific default waterfall hierarchy that includes capped additional contributions from non-defaulting members.
Text
Para 6.5, 6.8 and Para 6.11 of Chapter 3 (Settlements) of the SEBI Master circular for Stock Exchanges and Clearing Corporations dated October 16, 2023 prescribe guidelines to the contributions by various contributors to Core SGF of Limited Purpose Clearing Corporation (“LPCC”) and Default waterfall of LPCC respectively.
Based on consultations with various stakeholders, SEBI notified the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Second Amendment) Regulations, 2023 (SECC Amendment Regulations, 2023) on July 24, 2023 to enable direct participation by participants in the LPCC for transacting in tri-party repo for corporate bonds.
Contribution of Participants who desire direct participation and not through a clearing member to Core SGF shall be risk based and equivalent to deficit in MRC post contribution by Issuers and Clearing Members. The said contribution by Participants shall be subject to the following conditions: that no exposure shall be available on Core SGF contribution of any Participant... and that required contributions of individual Participants shall be pro-rata based on the risk they bring to the system.
LPCC shall have the flexibility to collect Participant primary contribution, including flexibility to either collect the Participant primary contribution upfront or staggered over a period of time. In case LPCC does not seek contribution from Participants or seeks staggered contribution, the remaining balance shall be met by LPCC to ensure adequacy of total Core SGF corpus at all times.
The term ‘Participant’ would be construed as defined in the Regulation 10A (1) of the SEBI (Stock Broker) Regulations 1992.
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 / [Participants] 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: a. Monies of defaulting member / [Participants]... b. Insurance, if any. c. Issuers contribution to Core SGF. d. LPCC resources (equal to 5% of MRC). e. Core SGF... f. Remaining LPCC resources... g. Remaining LPCC resources to the extent as approved by SEBI h. Capped additional contribution by non-defaulting members/ [Participants]. i. Any remaining loss to be covered by way of pro-rata haircut to payouts.
INR 100 Crore to be excluded only when remaining LPCC resources are more than INR 100 Crore.
LPCC shall call for the capped additional contribution only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by LPCC to market participants.
LPCC shall have relevant regulations/provisions for non-defaulting members / [Participants] to resign un-conditionally within the abovementioned period of 30 calendar days, subject to member / [Participant] closing out/settling any outstanding positions, paying the capped additional contribution and any outstanding dues to SEBI.
The maximum capped additional contribution by non-defaulting members / [Participants] shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF on the date of default.
In case loss allocation is effected through haircut to payouts, any subsequent usage of funds shall be with prior SEBI approval. Further, any exit by CC post using this layer shall be as per the terms decided by SEBI in public interest.
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Source: SecMarx — Contribution to Core Settlement Guarantee Fund and Default Waterfall for Limited Purpose Clearing Corporation (LPCC). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.