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Sebi now puts new settlement guarantee safety net in place

To safeguard markets from systemic risks, regulator Sebi on Wednesday put in place a new layer of safety net in form of 'core settlement guarantee fund' to mitigate risks from possible default in institutional trades. The new system would enhance the robustness of the present risk management system of the clearing corporations to enable them to deal with defaults of the clearing members much more effectively, Sebi said in a circular.

This new core fund would be created within the existing Settlement Guarantee Fund (SGF), against which no exposure is given and which is readily and unconditionally available to meet settlement obligations of clearing corporation in case of clearing members failing to honour settlement obligation. While aligning the stress testing practices of clearing corporations in India with best global practices prescribed by IOSCO (global body of regulators), the new system would take into account risk due to possible default in institutional trades.

It would also harmonise 'default waterfalls' across clearing corporations, limit the liability of non-defaulting members and ring-fence each segment of clearing corporation from defaults in other segments. Sebi has from time to time put in place various risk containment measures to address the risks involved in the securities market. One such measure prescribed was norms for Settlement Guarantee Fund (SGF) at stock exchanges including corpus, contribution, management, usage and recoupment of the fund corpus.

The new norms would further strengthen the system to deal with settlement defaults, although there have been very few such cases in recent times, as settlement commitments have mostly been meet even in times of freak trades and temporary outages on stock exchange platforms. In order to promote and sustain an efficient and robust global financial infrastructure, the Committee on Payments and Settlement Systems (CPSS) and IOSCO updated the standards applicable for systemically important financial market infrastructures with the PFMIs (Principles for Financial Market Infrastructures (PFMIs).

The new guidelines will align stress testing practices of clearing corporations with CPSS-IOSCO
Principles for Financial Market Infrastructures (PFMIs). The stress test, which will be conducted every day, would determine the minimum required corpus of 'core settlement guarantee fund'. This will be a dynamic process which will form the basis for replenishing the new fund every month.
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