Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC)

Last updated: 22 December 2020

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This circular updates the rules for Limited Purpose Clearing Corporations (LPCCs) regarding their Core Settlement Guarantee Fund (SGF), default waterfall procedures, and stress testing. It introduces new norms for contributions to the SGF from issuers, clearing members, and the LPCC itself. The default waterfall outlines the order in which resources are used in the event of a member default, with specific layers for different types of contributions and LPCC resources. These changes aim to enhance the robustness of the risk management system for clearing corporations.

Securities and Exchange Board of India CIRCULAR SEBI/HO/MRD2/DCAP/CIR/P/2020/245 December 21, 2020 To All recognized Clearing Corporations Dear Sir / Madam, Core Settlement Guarantee Fund, Default Waterfall and Stress Test for Limited Purpose Clearing Corporation (LPCC) 1. In o

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FAQ :

This circular aims to enhance the robustness of the risk management system for Limited Purpose Clearing Corporations (LPCCs) by prescribing granular norms for their Core Settlement Guarantee Fund (SGF), stress testing, and default waterfall procedures.

Contributions to the Core SGF of an LPCC come from Issuers of debt securities (0.5 basis points of issuance value per annum), Clearing Members (risk-based, equivalent to deficit in MRC post-issuer contribution), and the LPCC itself (transferring profits and potentially additional funds).

The default waterfall outlines the order of resource utilisation, starting with the defaulting member's monies, followed by insurance, issuer contribution, LPCC resources, Core SGF layers (penalties, previous profits, remaining SGF), further LPCC resources, capped additional contributions from non-defaulting members, and finally, pro-rata haircuts to payouts.

If the Core SGF is used, contributors must immediately replenish it to the Market Risk Capital (MRC) threshold based on their individual contribution usage. This replenishment is restricted to once every 30 calendar days. If a contributor fails to replenish, the LPCC will temporarily cover it.

Yes, for the first five years from the grant of recognition, LPCCs are prohibited from distributing dividends. All profits must be transferred to the Core SGF.

The provisions of this circular are effective from the date of grant of recognition to the LPCC by SEBI.