Mumbai: After a decade, during which the equity markets have undergone significant changes, the Indian capital market regulator is planning to enhance the settlement guarantee fund (SGF) to ensure it is larger and more resilient. This fund is created to handle contingencies that may arise from the failure of payment by any broker member of a stock exchange.
In addition to reviewing the fund size, the regulator is considering a potential change in the methodology used to calculate the fund requirement. This topic was discussed at the latest meeting of the risk management review committee of the Securities and Exchange Board of India (Sebi), as per a source familiar with the proposal.
This move is seen as part of an overall countercyclical regulatory approach to strengthen rules during times of stability.
“Various models for calculating the SGF are being explored to better assess future risks. If a more robust methodology is adopted, the fund size and contributions towards it may increase, although there are no plans to request contributions from exchange members,” said a source.
Unlike in some markets where members also contribute to the SGF, in India, the SGF corpus is funded by stock clearing corporations and exchanges. Currently, the combined SGF of the NSE and the BSE is approximately ₹7,000 crore based on the August 2014 framework provided by Sebi.
Since then, trading volumes in the equity market have increased significantly. For example, the average daily cash market trading volume has risen from ₹19,041 crore in 2014 to ₹1,20,933 crore now. Additionally, volumes in futures and options have surged from ₹2.79 lakh crore to ₹391 lakh crore during the same period.
The number of foreign portfolio investors registered with Sebi has also grown, with a net inflow of ₹97,349 crore in 2014 compared to ₹1.77 lakh crore in 2023. Furthermore, the settlement cycle in India is becoming shorter, with Sebi set to introduce same-day settlement a year after implementing the T+1 settlement mechanism.
A clearing corporation (CC), which houses the SGF, acts as an intermediary between brokers and stock exchanges. By assuming all counterparty risks on behalf of the exchange, a CC plays a crucial role in the clearing and settlement system.
In 2014, Sebi introduced a significant change in determining the SGF. CCs are required to maintain sufficient resources to cover losses from major defaults in the market to prevent systemic risk. Brokers, as clearing members, must provide collaterals in the form of fixed deposits, bank guarantees, securities, and cash to CCs.
These margins from members serve as the primary line of defense for CCs against defaults. However, the concept of ‘core SGF’ was introduced in 2014 as a secondary layer of defense, which is not linked to any exposure and is always available in liquid form. A new framework currently being explored could further strengthen the rules given the evolving market conditions.