SEBI Notifies Norms for Acceptable Collaterals and Exposure of Clearing Corporations

Introduction

In a notification[1] dated 29th May, 2024; the Securities and Exchange Board of India (SEBI) has issued norms pertaining to acceptable collaterals and exposure of clearing corporations to increase and strengthen the mechanism of risk management along with framework for Clearing Corporation (CCs). The key points of the norms are as follows:

List of Collaterals accepted by Clearing Corporations

The SEBI master circular has defined and notified the permissible liquid assets which the applicable cuts for management of risk which include cash, bank fixed deposits, bank guarantees, central government securities and other units of mutual liquid funds.

Under the overnight mutual funds, the units of growth plans are subject to a 5% haircut while the limit for other plans remains unchanged at 10%. In case of equity shares, only those equity shares shall be accepted which possess an impact cost up to 0.1% of an order value of INR 1 lakh and are traded for 99% of the previous six months. It is pertinent to note that only acceptable liquid assets have been modified by the notification while other assets such as bullions, gold EFTs, agricultural commodities, diamonds and base metals have remained unchanged.

Prudential Norms for Exposure of Clearing Corporations

There have also been significant changes in the prudential norms for exposure of clearing corporations which include changes in the investment policies wherein the corporations must abide by the principles of investing their own funds and the Core Settlement Guarantee Fund (SGF) as specified under the Master Circulars issued by the SEBI. Secondly, the need to monitor and manage the exposure for ensuring operational resilience has also been placed upon the Clearing Corporations.

The types of exposures under the prudential norms may include investments in fixed deposits (FDs), mutual funds, trade bills, government securities and other exposures which may arise through members or other stakeholders. Additionally, the banks must also have a minimum net worth of INR 5,000 Crores along with a long-term rating of ‘AA’ or above and should meet the capital adequacy requirements and should not lie under the RBIs PCA framework.  Moreover, the daily exposure to a single bank should not exceed a total of 15% for AAA ratings and 10% for AA rated banks while the total overall bank exposure should not exceed 20% of the total liquid assets. The Clearing Corporations are also barred from accepting collaterals from their members’ own group entities and should adequately monitor the compliance to these rules at every day’s end.

Conclusion

Through the notification, the SEBI has mandatorily instructed the Clearing Corporations to update their systems and amend their bylaws and rules, inform market participants and publish/broadcast such guidelines on their websites. These steps have been taken in order to ensure a better risk management mechanism along with operational resilience and promotion of stability and sustainability in the market which shall come into effect from 01st August, 2024.

[1] https://www.sebi.gov.in/legal/circulars/may-2024/norms-for-acceptable-collaterals-and-exposure-of-clearing-corporations_83650.html