Clearing body of NSE sets aside ₹624 cr to meet default risk obligation

The clearing corporations of the BSE, NSE and MCX-SX have earmarked the core settlement guarantee fund (SGF) for December at ₹129.1 crore, ₹624 crore and ₹22.76 crore, respectively (see table).

This follows a SEBI directive on August 27 to clearing corporations to set up a core SGF for each segment (equity, debt and derivatives of equities and currency) to guarantee settlement of trades.

The core SGF would be used to fulfil the obligations of a defaulting clearing member and complete the settlement without affecting the normal settlement process. Settlement occurs when the demat account of the buyer is credited with securities and the bank account of the seller is credited with funds.

The time taken for normal settlement is T+2 – second working day after the trade has been executed.

Investors said higher margins could be charged to entities that cause higher volatility on exchanges.

Arun Kejriwal, Founder, KRIS Research, said: “The amount earmarked as core SGF is adequate considering any eventuality that may arise on the exchanges. One, however, needs to look at the possibility that with increasing proportion of high-frequency trade (HFT)/algo trades, there could arise a situation where two such orders get matched leading to greater volatility. These systems, which are expensive, are typically used by institutions which, in any case, can afford higher margins.”

In August, SEBI’s risk management review committee prescribed the default waterfall — the order in which a clearing corporation applies different types of its financial resources to meet a default loss, such as margins brought in by the defaulting participant, clearing funds and its own assets.

The first to be used would be the monies of the defaulting member, including any excess money of the defaulter in other segments. Next would be insurance followed by the clearing corporation’s (CC) resources of up to 5 per cent of the minimum required corpus.

The core SGF would be used in the following order — first would be penalties followed by a minimum of 25 per cent of the segment minimum required corpus.

Then the remaining contribution of the CC, stock exchange and non-defaulting members’ primary contribution to the core SGF on a pro-rata basis would be used to make good the loss.

The last in the list would be any remaining CC resources, contribution of CC/SEs to core SGFs of other segments.

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