SEBI Comes Out With Framework For Orderly Winding Down Of Clearing Corps

SEBI has put in place a framework for orderly winding down of critical operations and services of clearing corporations (CCs).

<div class="paragraphs"><p>(Source: Reuters)</p></div>
(Source: Reuters)

Capital markets regulator SEBI on Friday put in place a framework for orderly winding down of critical operations and services of clearing corporations (CCs).

Under the framework, CCs will have to draw up a Standard Operating Procedure (SOP) outlining the manner in which their critical services would be carried out in an orderly manner so as to not cause any disruption to the financial system, upon triggering of any of voluntary or involuntary winding down of operations.    

Under the framework, scenarios which may potentially prevent a clearing corporation from being able to provide its critical services and may lead to winding down of its critical operations and services have been identified.     The reasons for winding down of CC can be voluntary or involuntary, the Securities and Exchange Board of India said in a circular.

Involuntary winding down would depend on factors such as regulatory action, losses due to default by clearing member and losses due to other factors like some large operational expenses, legal expense or investment losses.    

As per the regulatory requirements, a CC would be required to continuously meet the annual clearing turnover of at least Rs 1,000 crore per annum.    

In case the CC fails to meet the requirement for two consecutive years, it will be liable to exit and accordingly, apply for orderly winding down of its critical operations and services.      

The threshold condition would not be applicable to a CC for a period of 5 years from the date of grant of recognition.        

In case where the CC does not apply for voluntary winding down after breaching the minimum turnover threshold, Sebi may proceed with compulsory derecognition of such CC under applicable laws.      

The regulator has asked CCs to make the policy framework containing the SOP duly approved by their governing boards and make it available on their websites within 90 days.    

To identify the operations and services which may be classified as critical, CC would have to consider their risk profile, operations, organisational structure, financial resources, business practices, interconnectedness and interdependencies.    

"As timely clearing and settlement of trades is a core function of CCs, the operations and services such as collateral management, risk management, clearing and settlement, etc shall be deemed to be critical," SEBI said.

Further, the contractual obligations of CCs with clearing members, stock exchanges, depositories and other CCs, arising out of clearing and settlement of trades, would necessarily be classified as critical.      With regard to SOP, the regulator said an intimation regarding winding down needs to be issued by the CC as and when the scenarios get triggered, with prior approval of SEBI.     

The SOP shall include details of infrastructure and premises, technological systems including back-up and outsourcing activities which would need to be retained or continued for orderly winding down of critical operations and services.

It would also contain details of key employees, along with their roles and obligations, who would be retained and responsible for development and ongoing monitoring of the critical operations and services, once the process of orderly winding down of critical operations and services is initiated.       

The CCs would include the operational modalities relating to transfer or close-out of positions and collateral in detail considering interoperable or non-interoperable scenarios as applicable, while framing their policy for orderly winding down of critical operations and services.    

SEBI said that quantum of assets available for distribution would be arrived at after payment of statutory dues, including applicable taxes and contribution to the regulator, return of refundable collateral and membership deposits of clearing members (CMs), return of deposits to warehouse service providers, if any, and the unutilised Core SGF contributions of CMs and stock exchanges.    

Subsequent to exit, the CC would also be required to contribute up to 20 per cent of its assets towards SEBI Investor Protection and Education Fund (IPEF) in order to provide for settlement of any claims pertaining to pending arbitration cases, unresolved complaints or grievances lying with the CC.      

The regulatory oversight committee (ROC) of the CC would oversee the implementation of processes involved in orderly winding down of critical operations and services and would submit a report to SEBI.

In a separate circular, SEBI said rules pertaining to 'Principles of Financial Market Infrastructures' will apply to AMC Repo Clearing Limited.        This mandates clearing corporations and depositories to comply with the Principles of Financial Market Infrastructures (PFMIs) published by the committee on payments and settlement systems and the International Organization of Securities Commissions (IOSCO).    

This came after SEBI in January this year granted recognition to AMC Repo Clearing Limited as a clearing corporation for the purpose of clearing and settling transactions in repo and reverse repo in the debt securities that are traded on a stock exchange.    

In October 2020, SEBI allowed setting up of a Limited Purpose Clearing Corporation for clearing and settlement of repo transactions in debt securities.