Composition and Contributions to Core Settlement Guarantee Fund
SEBI vide its circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014
has issued norms related to Core Settlement Guarantee Fund (Core SGF),
Stress Testing and Default Procedures for Cash Market segment, Futures and
Options segment and Currency Derivatives segment. SEBI further vide its
circular no. SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated July 11, 2018 has
specified that clearing corporations clearing commodity derivatives transactions
shall also comply with the provisions of the SEBI circular dated August 27,
2014.
I. Core Settlement Guarantee Fund
NSE Clearing shall have a fund called Core SGF for each clearing segment to
guarantee the settlement of trades executed in respective segment.
In the event of a clearing member (member) failing to honour settlement
commitments, the Core SGF shall be used to fulfill the obligations of that
member and complete the settlement without affecting the normal settlement
process.
II. Corpus of Core SGF
NSE Clearing shall maintain core SGF based solely on the methodology
prescribed by SEBI for determining the minimum required corpus of Core SGF
for cash market, futures and options, currency derivatives segments and
commodity derivatives segment. For debt segment and tri-party repo, the
minimum required corpus shall be determined in accordance with the criteria
approved by NSE Clearing Board. In addition to SEBI specified stress test
scenarios, NSE Clearing may consider additional scenarios for determination
of Minimum Required Corpus. (Refer Appendix to the Policy for details on
stress testing)
A. Cash Segment
NSE Clearing shall calculate the total credit exposure due to simultaneous
default causing highest credit exposure by;
1. At least two clearing members and their associates
2. 1 Custodian
B. Futures and Options segment
NSE Clearing shall calculate Minimum Required Corpus by considering the
total credit exposure due to simultaneous default of at least two clearing
members (CM) and their associates causing highest credit exposure under
extreme but plausible worst case loss scenarios.
C. Currency Derivatives segment
NSE Clearing shall calculate Minimum Required Corpus by considering the
total credit exposure due to simultaneous default of at least two clearing
members (CM) and their associates causing highest credit exposure under
extreme but plausible worst case loss scenarios.
D. Commodity Derivatives segment
NSE Clearing shall calculate Minimum Required Corpus by considering the
total credit exposure due to;
1. Simultaneous default of at least two clearing members (and their
associates) causing highest credit exposure or
2. 50% of the credit exposure due to simultaneous default of all clearing
members
The Minimum Required Corpus computed above shall be subject to minimum
threshold value of Rs 10 crores as specified by SEBI its circular no.
SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated July 11, 2018.
E. Debt segment
NSE Clearing shall arrive at the required corpus of core SGF based on the
following criteria where Minimum Required Corpus for Core SGF of Debt
Segment shall be the higher of:
1. Aggregate of losses of top 2 members assuming close out of obligations
at loss of 4% less required margins
2. Rs. 4 crores
F. Tri-party repo
NSE Clearing shall arrive at the required corpus of core SGF based on stress
test loss for a given day as follows;
1. The total uncovered los for each clearing member will be considered as
sum of uncovered loss for lending obligations and uncovered loss for
borrowing obligations
2. The sum of total uncovered loss of top two members in terms of highest
total uncovered loss will be considered as stress test loss for a given
day.
The Core SGF has been set up initially with a Minimum Required Corpus of Rs.
17 Crores.
G. Securities Lending and Borrowing Scheme
In the Securities Lending and Borrowing Scheme, NSE Clearing is acting as an
approved intermediary in accordance with SEBI circular no.
MRD/DoP/SE/Dep/Cir- 14 /2007 dated December 20, 2007.
Securities Lending and Borrowing Scheme is not a segment of NSE or NSE
Clearing. As per the SEBI circular, Core SGF is to be constituted for each
segment of each Recognised Stock Exchange (SE) to guarantee the settlement
of trades executed in respective segment of the SE.
Since Securities Lending and Borrowing is not a segment, Core SGF shall not
be constituted for Securities Lending and Borrowing Scheme.
III. Minimum Required Corpus
NSE Clearing shall compute the Minimum Required Corpus (MRC) for cash
market, futures and options, currency derivatives, commodity derivatives and
debt segment which shall be subject to the following;
1. The MRC shall be fixed for a month.
2. By 15th of every month, NSE Clearing shall review and determine the MRC
for next month based on the results of daily stress tests of the preceding
month. NSE Clearing shall also review and determine by 15th of every
month, the adequacy of contributions made by various contributors and any
further contributions to the Core SGF required to be made by various
contributors for the next month.
3. For every day of the preceding month, uncovered loss numbers shall be
estimated by the various stress tests for credit risk conducted by the NSE
Clearing for the segment and highest of such numbers shall be taken as
worst case loss number for the day.
4. Average of all the daily worst case loss numbers determined in (3) shall be
calculated.
5. The MRC for next month shall be higher of the average arrived in at step
(4) and the segment MRC as per previous review.
6. Daily stress tests:
a. For Cash Market segment, Futures and Options segment and
Currency derivative segment, the daily stress tests shall be
conducted in the manner specified by SEBI vide its circular no.
CIR/MRD/DRMNP/25/2014 dated August 27, 2014.
b. For Commodity Derivatives segment, the daily stress tests shall be
conducted in the manner specified by SEBI vide its circular no.
SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated July 11, 2018.
c. For debt segment and tri-party repo, the daily stress tests shall be
conducted as per the criteria approved by NSE Clearing Board.
V. Contribution to Core SGF
A. Cash Market Segment, Futures & Options Segment, Currency
Derivatives Segment and Commodity Derivatives segment
1. NSE Clearing contribution to core SGF will be minimum 50% of MRC of
each segment. NSE Clearing shall make this contribution from its own
funds. NSE Clearing contribution to core SGFs will be considered as part
of its net worth.
2. Stock Exchanges contribution to core SGF will be minimum 25% of MRC.
3. For contributions as per Point 1 and 2 above, any incremental requirement
of Minimum Required Corpus from NSE Clearing and Stock Exchanges
shall be adjusted against the interest accrued on cash contribution of CC
and Exchanges respectively (interest accrued as mentioned in Point VI)
before calling for additional contribution from them.
4. The total contribution from members to core SGF for each segment will not
be more than 25% of MRC of the respective segment.
a. The clearing member contribution shall consist of Minimum
contribution and Dynamic contribution.
b. A Minimum contribution will be required to be maintained by all
clearing members at all times. Members will be required to bring in
minimum contribution since all members have inherent risk potential
and should all participate in loss mutualisation.
c. The dynamic contributions of individual CMs shall be assessed pro-
rata based on the risk they bring to the system.
i. Dynamic contribution for members will be arrived at in the
monthly review.
ii. The members shall be informed about their primary
contribution (minimum and dynamic) along with their capped
additional contribution (assessed for Layer 7 of default
waterfall) by the 15th of each month.
iii. The members shall be required to bring in dynamic
contribution before the start of the month.
iv. In case there is failure on part of clearing members to bring in
their requisite contribution to Core SGF for any month by the
start of the month, the trading facility of trading members and
/or clearing facility of custodial participants clearing through
such members/custodians shall be withdrawn, until such
members replenish their contribution.
v. Further penalty as applicable for margin shortfall may be
levied to the clearing members.
d. NSE Clearing may collect Clearing Member (CM) primary
contribution either upfront or staggered over a period of time.
e. NSE Clearing shall accept clearing member primary contribution in
the form of cash, fixed deposits and central government securities
which shall be adjusted from their margin deposit or security
deposits, either fully or partly, subject to availability. In case no such
deposits are available, fresh deposits would be required to be
deposited. No exposure shall be available to CMs on their
contribution to core SGF.
f. NSE Clearing shall release the member’s contribution to Core SGF
in cases where the current contribution of the member with NSE
Clearing is in excess of required contribution assessed at the time of
review and determination of MRC. The release of excess
contribution shall be made after completion of review but before start
of the month for which the MRC review is applicable.
g. In case of staggered contribution as mentioned in Point (d) above,
the remaining balance shall be met by NSE Clearing to ensure
adequacy of total Core SGF corpus at all times. Such contribution
shall be available to NSE Clearing for withdrawal as and when
further contributions from CMs are received.
h. Currently as per SEBI circular reference no
SEBI/HO/MRD/DRM/NP/CIR/P/2016/54 dated May 04, 2016
clearing member contribution has been contributed by NSE in Cash
Market Segment, Futures & Options Segment and Currency
Derivatives Segment.
i. In commodity derivatives segment, the clearing member contribution
shall be met by NSE.
B. Debt Segment
The contribution to core SGF for Debt Segment from various contributors shall
be as follows;
1. NSE Clearing contribution to core SGF shall be 75% of MRC.
2. NSE contribution to core SGF shall be 25% of MRC.
3. For contributions as per Point 1 and 2 above, any incremental requirement
of Minimum Required Corpus from NSE Clearing and NSE shall be
adjusted against the interest accrued on cash contribution of CC and
Exchanges respectively (interest accrued as mentioned in Point VI) before
calling for additional contribution from them.
4. NSE Clearing shall not seek contribution from its clearing members in Debt
Segment.
C. Tri-party repo
The contribution to core SGF for Tri-party from various contributors shall be as
follows;
1. Clearing Members to contribute 50% of the MRC at a minimum
2. Clearing Member total contribution not to exceed 75% of the MRC
3. The average open positions for each member (lend plus borrow) for the
review month shall be considered. The total clearing member contribution
shall be allocated pro-rata to all clearing members based on their average
open position during the review month.
4. The remaining amount to be contributed by the Clearing Corporation and
the Exchange in equal proportion.
5. The initial contribution shall be made by NSE Clearing and NSE only in
equal proportion.
VI. Penalties levied by NSE Clearing
Any penalties levied by NSE Clearing (as per Regulation 32 of SECC
Regulations, 2018) shall be credited to Core SGF corpus.
VII. Interest on Core SGF cash contribution
Interest on cash contribution to Core SGF shall also accrue to the Core SGF
and pro-rata attributed to the contributors in proportion to their cash
contribution.
Appendix: Stress testing
A. Cash Market
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests in Cash Market Segment to
arrive at the uncovered losses at member / Custodian level under the
following scenarios;
I. SEBI specified scenarios:
i. Default by at least two clearing members and their associate
members
ii. Default by 1 Custodian
II. Additional stress scenarios:
i. Defaults by top two clearing members and their associate
custodian(s)
ii. Default by top custodian and its associate clearing member(s)
b) Loss estimation
i. The stress tests shall be conducted on S day (Day of Stress Test) and
uncovered losses will be arrived at for the above scenarios. For each
scenario, the uncovered losses for a member / custodian will be
computed for trades executed on S-2 day, S-1 day and S day till pay-
in deadline.
ii. It shall be assumed that each clearing member (CM) / custodian would
default in meeting its ‘cumulative funds pay-in’ and ‘cumulative
securities pay-in’ obligations.
iii. Any early pay-in of funds/securities shall be ignored.
iv. Cumulative pay-in/pay-out of each clearing member’s trades shall
include non-institutional trades and 2X% of institutional trades
undertaken on S-2 day, S-1 day and S day till pay-in deadline that
has not yet been confirmed
v. X% shall be the highest daily % by value of custodial rejections in the
previous 12 months.
vi. Securities Pay-in failure: It shall be assumed that the failure to bring
in securities would result in financial close out and NSE Clearing
would suffer a loss of minimum 20% of the value of such transaction.
vii. Funds Pay-in failure: The assumed loss on liquidation that would be
paid out by the defaulting member/custodian shall be;
▪ Group 1 securities: 20%
▪ Group 2 and 3 securities: 20% scaled up by root of 3
viii. Gross loss due to the member/custodian = (Funds pay-in) + (120% of
securities pay-in) – (liquidation value of securities pay out)
ix. The credit exposure of NSE Clearing towards each member/custodian
shall be determined by assessing the gross loss of the
member/custodian against the defaulting member/custodians
required margins (i.e. assuming early pay-in if any has not been
made) and mandatory deposits (equity scrips as collateral valued with
minimum 20% haircut). Excess collateral if any shall be ignored.
x. Total credit exposure to NSE Clearing due to default of
member/custodian shall be determined for each of the stress test
scenarios mentioned above.
B. Futures & Options segment
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests in Futures & Options Segment to
arrive at the uncovered losses at clearing member level under the following
scenarios;
I. SEBI specified hypothetical scenarios:
The price movement in respect of each underlying to the extent of 1.5 times the
normal price scan range (PSR) and 1.5 times the normal volatility scan range
shall be considered.
i. Underlying price increasing by 1.5 PSR, volatility increasing by 1.5 VSR
ii. Underlying price decreasing by 1.5 PSR, volatility increasing by 1.5 VSR.
II. SEBI specified historical scenarios:
The price movement in respect of each underlying over the last 10 years will be
considered on a rolling basis. The maximum percentage price movement shall
be applied to the price on the day for which the stress test is being done:
i. Maximum percentage rise over a period of 1 day
ii. Maximum percentage fall over a period of 1 day
b) Loss estimation
Simultaneous default of at least top 2 clearing members (and their associates)
causing highest credit exposure shall be considered and arrived as follows:
1. Time of stress test is at the time of pay-in deadline
2. Loss shall be calculated at client/proprietary portfolio level
3. Loss shall be computed for each contract in the portfolio
4. All open positions assumed to be squared up at the theoretical price
corresponding to the revised prices of underlying in each of the 4
scenarios
5. Losses/Profits at the contract level aggregated to client/proprietary
portfolio level
6. For each client;
• Gross loss = Loss as per (5) above – Margins
• Profits shall be ignored.
7. For proprietary level;
• Gross loss = Loss as per (5) above
• Profits shall be ignored.
8. Gross loss at CM level = Aggregate of losses of all clients/proprietary
portfolios
9. Uncovered loss at CM level = Gross loss as per (8) above + funds pay-
in/pay-out (-) – Required Margins – Mandatory Deposits (where equity
scrips as collateral valued with minimum 20% haircut).
10. Excess collateral if any shall be ignored.
C. Currency Derivatives segment
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests in Futures & Options Segment to
arrive at the uncovered losses at clearing member level under the following
scenarios;
I. SEBI specified hypothetical scenarios
The price movement in respect of each underlying to the extent of 1.5 times the
normal price scan range (PSR) and 1.5 times the normal volatility scan range
shall be considered.
i. Underlying price increasing by 1.5 PSR, volatility increasing by 1.5 VSR
ii. Underlying price decreasing by 1.5 PSR, volatility increasing by 1.5 VSR.
II. SEBI specified historical scenarios
The price movement in respect of each underlying over the last 10 years will be
considered on a rolling basis. The maximum percentage price movement shall
be applied to the price on the day for which the stress test is being done:
i. Maximum percentage rise over a period of 1 day
ii. Maximum percentage fall over a period of 1 day
III. Additional stress scenarios
i. 4% fall in underlying prices of all currency pairs
ii. 4% rise in underlying prices of all currency pairs
iii. 2% fall in underlying prices of all interest rate futures
iv. 2% rise in underlying prices of all interest rate futures
b) Loss estimation
I. For SEBI specified scenarios
Simultaneous default of at least top 2 clearing members (and their associates)
causing highest credit exposure shall be considered and arrived as follows:
1. Time of stress test is at the time of pay-in deadline
2. Loss shall be calculated at client/proprietary portfolio level
3. Loss shall be computed for each contract in the portfolio
4. All open positions assumed to be squared up at the theoretical price
corresponding to the revised prices of underlying in each of the 4
scenarios
5. Losses/Profits at the contract level aggregated to client/proprietary
portfolio level
6. For each client;
• Gross loss = Loss as per (5) above – Margins
• Profits shall be ignored.
7. For proprietary level;
• Gross loss = Loss as per (5) above
• Profits shall be ignored.
8. Gross loss at CM level = Aggregate of losses of all clients/proprietary
portfolios
9. Uncovered loss at CM level = Gross loss as per (8) above + funds pay-
in/pay-out (-) – Required Margins – Mandatory Deposits (where equity
scrips as collateral valued with minimum 20% haircut).
10. Excess collateral if any shall be ignored.
II. For additional stress scenarios
Simultaneous default of at least top 2 clearing members (and their associates)
causing highest credit exposure shall be considered and arrived as follows:
1. Loss shall be calculated at client/proprietary portfolio level
2. Loss shall be computed for each contract in the portfolio
3. All open positions assumed to be settled at the revised underlying close
prices
4. Losses/Profits at the contract level aggregated to client/proprietary
portfolio level.
5. At each client/proprietary level,
• Gross loss = Loss as per (4) above – Margins
• Profits shall be ignored.
6. Gross loss at CM level = Aggregate of losses of all clients/proprietary
portfolios
7. Uncovered loss at CM level = Gross loss as per (6) above + funds pay-
in/pay-out (-)
D. Debt Segment
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests in Debt Segment to arrive at the
uncovered losses at clearing member level by assuming default of top two
clearing members.
b) Loss estimation
i. It shall be assumed that each clearing member (CM) would default in
meeting its ‘cumulative funds pay-in’ and ‘cumulative securities pay-in’
obligations
ii. It shall be assumed that obligations shall be closed out at loss of 4%
iii. Gross loss due to the member/custodian = (Funds pay-in) + Loss due to
financial close out – liquidation value
iv. The credit exposure of NSE Clearing towards each member/custodian
shall be determined by assessing the gross loss of the
member/custodian against the defaulting member/custodians required
margins (i.e. assuming early pay-in if any has not been made) and
mandatory deposits (equity scrips as collateral valued with minimum
20% haircut). Excess collateral if any shall be ignored.
v. Total credit exposure to NSE Clearing due to default of member shall be
considered for the stress test scenario mentioned above.
E. Tri-party repo
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests for Tri-party repo to arrive at the
uncovered losses at clearing member level under the following scenarios;
I. Scenario for lend obligation
i. Clearing members shall be assumed to default on their lend obligations.
ii. The funding cost of Clearing Corporation will be considered as 80%
(annualized).
iii. The funding cost of each of the lend position will be calculated as the
interest applicable for the period of lending.
iv. The funding cost in excess of the lend margin of each clearing member
will be noted. This will be termed as the uncovered loss for lend
obligations.
II. Scenario for borrow obligation
i. Clearing members shall be assumed to default on their borrow
obligations.
ii. The gross value of collateral of the clearing member will be considered.
iii. The collateral shall be assumed to be liquidated at 25% below the value
of the collateral. This valuation will be termed as stressed valuation of
collateral.
iv. The forward leg borrow obligation in excess of the stressed value of
collateral will be noted. This will be termed as uncovered loss for borrow
obligations.
b) Loss estimation
The stress test loss shall be estimated as under:
i. The total uncovered loss for each clearing member will be considered as
sum of uncovered loss for lending obligations and uncovered loss for
borrowing obligations
ii. The sum of total uncovered loss of top two members in terms of highest
total uncovered loss will be considered as stress test loss for a given
day.
F. Commodity Derivatives segment
a) Stress test scenarios
NSE Clearing shall conduct daily stress tests in Commodity Derivatives
Segment to arrive at the uncovered losses at clearing member level under the
following scenarios;
I. Historical Scenarios:
1. Peak Historical Return:
Scenario 1A: Maximum % rise over MPOR period in last 15 years
Scenario 1B: Maximum % fall over MPOR period in last 15 years
2. Peak Historical Volatility:
Scenario 2A: Minimum of 3.5 times the peak historical volatility in last 15
years or 110% of scenario 1 for price fall
Scenario 2B: Minimum of 3.5 times the peak historical volatility in last 15
years or 110% of scenario 1 for price rise
3. Augmented historical:
Top 10 days during previous 15 years based on absolute average price
movement across all underlying. All the price movements scaled up by
10% (10 Scenarios)
II. Hypothetical Scenario:
4. Stress MPOR:
Scenario 4A: 3.5 times of current day volatility scaled up by square root
of 5 for price rise
Scenario 4B: 3.5 times of current day volatility scaled up by square root
of 5 for price fall
5. Stressed PSR & VSR
Scenario 5A: Underlying price increasing by 1.5 PSR, volatility
increasing by 1.5 VSR
Scenario 5B: Underlying price decreasing by 1.5 PSR, volatility
increasing by 1.5 VSR
Stress tests are conducted using each of the scenario given above:
i. By stressing positions in all commodities simultaneously
ii. By first identifying top 10 commodities based on open interest and
stressing 1 commodity at a time.
b) Loss estimation
For each of the scenarios Clearing Corporation calculates the total credit
exposure due to;
i. Simultaneous default of at least 2 clearing members (and their
associates) causing highest credit exposure or
ii. 50% of the credit exposure due to simultaneous default of all clearing
members
All open positions are assumed to be squared up at the theoretical price
corresponding to the revised prices of the underlying in each of the above
scenarios the net profit/loss in squaring off the portfolio is to be calculated under
each of the above scenarios.
For each clearing member, the credit exposure to CC calculated as follows:
i. Time of stress test is End of day.
ii. Losses calculated at client portfolio level.
iii. For each client, residual loss shall be equal to –> (loss due to close-out
of client positions – margin supporting client positions)
iv. All residual losses (residual profits to be ignored) for all clients shall be
grossed to compute total residual losses due to client positions.
v. Loss due to close-out of proprietary positions shall be considered.
vi. Loss at (iv) and loss at (v) and the net pay-in/pay-out requirement of the
clearing member (pay-in and pay-out pertaining to requirements of both
S-1 and S (till pay-in time) day to be reckoned) shall be assessed against
required margins (excluding margin supporting client positions and
excess collateral, if any) and other mandatory deposits of defaulting
member to calculate credit exposure of CC to the member. Equity scrips
as collateral, if any, shall be valued with minimum 20% haircut
