The circular SEBI/HO/MRD/MRD-POD-2/P/CIR/2024/83 dated June 19, 2024, addresses contributions to the Core Settlement Guarantee Fund (SGF) and outlines the default waterfall for Limited Purpose Clearing Corporations (LPCC).
Here are the key points summarized:
1. Core SGF Contributions:
- Participants' Contribution: Participants can directly contribute to the Core SGF of LPCC instead of through a clearing member. This contribution is risk-based and must cover the deficit in Minimum Required Contribution (MRC) after contributions from issuers and clearing members.
- Contributions are pro-rata based on the risk each participant poses to the system. LPCC has flexibility in collecting these contributions upfront or staggered over time.
2. Timelines for SGF Contribution and Recoupment:
- After the SGF is used during a calendar month due to defaults, contributors must replenish it immediately to meet the MRC.
- Contributors can only replenish SGF once within a 30-calendar-day period following notice of default, regardless of the number of defaults.
3. Default Waterfall:
- Order of Priority: The default waterfall specifies the order in which funds are utilized in case of defaults:
a. Defaulting members' contributions to SGF
b. Insurance proceeds
c. Issuers' contributions to SGF
d. LPCC resources (5% of MRC)
e. Core SGF:
- Penalties
- Previous profits of LPCC
- LPCC's contribution and non-defaulting participants' contributions pro-rata
- Remaining profits of LPCC
f. LPCC's remaining resources (excluding higher of INR 100 Crore or the capital requirement towards orderly winding down of critical operations and services)
g. Additional capped contributions by non-defaulting participants
h. Pro-rata haircut to payouts to cover any remaining losses.
4. Implementation Guidelines:
- Clearing Corporations must amend their bye-laws, rules, and regulations to incorporate these guidelines immediately.
- They are required to inform participants/clearing members and publish the circular on their website.
- Status of implementation needs to be reported to SEBI monthly.
This circular aims to enhance the stability and resilience of LPCCs by refining contribution mechanisms to the Core SGF and establishing a clear protocol for managing defaults through a structured waterfall approach.
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