INDIA: SEBI issues Circular on Core Settlement Guarantee Fund, Default Waterfall and Stress Testing

Thursday August 28 2014

Securities and Exchange Board of India (SEBI) has issued a circular dated 27 August 2014 prescribing norms for Core Settlement Guarantee Fund (Core SGF), Default Waterfall and Stress Testing.

These guidelines are aimed at enhancing the robustness of the present risk management system of the clearing corporations (CCs) to enable them to deal with defaults of the clearing members much more effectively by achieving the following:

• Creating a core fund (called Core Settlement Guarantee Fund), within the 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 member(s) failing to honour settlement obligation.
• Aligning stress testing practices of clearing corporations with CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs) (norms for stress testing for credit risk, stress testing for liquidity risk and reverse stress testing including frequency and scenarios).
• Capturing in stress testing, the risk due to possible default in institutional trades.
• Harmonising default waterfalls across clearing corporations.
• Limiting the liability of non-defaulting members in view of the Basel capital adequacy requirements for exposure towards Central Counterparties (CCPs).
• Ring-fencing each segment of clearing corporation from defaults in other segments.
• Bringing in uniformity in the stress testing and the risk management practices of different clearing corporations especially with regard to the default of members.

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