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๐’๐„๐๐ˆ ๐ƒ๐‘๐€๐…๐“ ๐‚๐ˆ๐‘๐‚๐”๐‹๐€๐‘: ๐“๐‘๐„๐€๐“๐Œ๐„๐๐“ ๐Ž๐… ๐ˆ๐๐“๐„๐‘๐„๐’๐“ ๐ˆ๐๐‚๐Ž๐Œ๐„ ๐Ž๐ ๐‚๐€๐’๐‡ ๐‚๐Ž๐‹๐‹๐€๐“๐„๐‘๐€๐‹๐’ ๐‘๐„๐‚๐„๐ˆ๐•๐„๐ƒ ๐๐˜ ๐‚๐‹๐„๐€๐‘๐ˆ๐๐† ๐‚๐Ž๐‘๐๐Ž๐‘๐€๐“๐ˆ๐Ž๐๐’ ๐…๐‘๐Ž๐Œ ๐‚๐‹๐„๐€๐‘๐ˆ๐๐† ๐Œ๐„๐Œ๐๐„๐‘๐’ ๐€๐๐ƒ ๐”๐๐’๐“๐‘๐„๐€๐Œ๐„๐ƒ ๐‚๐‹๐ˆ๐„๐๐“ ๐…๐”๐๐ƒ๐’

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SEBI has released a draft circular for public feedback regarding the handling of interest income by ๐‚๐ฅ๐ž๐š๐ซ๐ข๐ง๐  ๐‚๐จ๐ซ๐ฉ๐จ๐ซ๐š๐ญ๐ข๐จ๐ง๐ฌ (CCs) on cash collaterals obtained from ๐‚๐ฅ๐ž๐š๐ซ๐ข๐ง๐  ๐Œ๐ž๐ฆ๐›๐ž๐ซ๐ฌ (CMs) and client funds upstreamed to them.

CCs manage pivotal functions such as Clearing and Settlement, along with Risk Management, as part of their operational duties. They are mandated to retain various deposits, collaterals, and settlement obligations from CMs, a portion of which typically comprises cash. Notably, CCs have been observed to accumulate significant cash collaterals from CMs, primarily for settlement obligations and margin requirements, from which they earn interest income through investments.

As per the ๐’๐ž๐œ๐ฎ๐ซ๐ข๐ญ๐ข๐ž๐ฌ ๐‚๐จ๐ง๐ญ๐ซ๐š๐œ๐ญ๐ฌ (๐‘๐ž๐ ๐ฎ๐ฅ๐š๐ญ๐ข๐จ๐ง) (๐’๐ญ๐จ๐œ๐ค ๐„๐ฑ๐œ๐ก๐š๐ง๐ ๐ž๐ฌ ๐š๐ง๐ ๐‚๐ฅ๐ž๐š๐ซ๐ข๐ง๐  ๐‚๐จ๐ซ๐ฉ๐จ๐ซ๐š๐ญ๐ข๐จ๐ง๐ฌ) ๐‘๐ž๐ ๐ฎ๐ฅ๐š๐ญ๐ข๐จ๐ง๐ฌ, 2018, the definitions for key terms are as follows:

๐’๐ž๐œ๐ญ๐ข๐จ๐ง 2(๐) defines Clearing Corporation as an entity established to manage the clearing and settlement of trades in securities or other traded products on recognized stock exchanges, encompassing a clearinghouse.

๐’๐ž๐œ๐ญ๐ข๐จ๐ง 2(๐ž) defines a Clearing Member as an entity with clearing rights in any recognized clearing corporation.

SEBI’s ๐‘๐ข๐ฌ๐ค ๐Œ๐š๐ง๐š๐ ๐ž๐ฆ๐ž๐ง๐ญ ๐‘๐ž๐ฏ๐ข๐ž๐ฐ ๐‚๐จ๐ฆ๐ฆ๐ข๐ญ๐ญ๐ž๐žย (SEBI RMRC) has discussed the current practice of CCs earning interest income on cash collaterals from CMs and client funds. Key observations include:

ยทย ย ย ย ย ย Mandating segregation between CCs’ own funds and funds received as cash collaterals from CMs and client funds at all times.

ยทย ย ย ย ย ย Permitting CCs to invest cash collaterals received from CMs and client funds in highly liquid financial instruments, subject to SEBI’s investment norms for the Core Settlement Guarantee Fund (SGF) corpus, thereby minimizing market and credit risks.

ยทย ย ย ย ย ย Requiring CCs to distribute interest income earned on these cash collaterals and client funds to CMs at regular intervals (at least quarterly), or alternatively, adding it to CMs’ collaterals after accounting for costs, taxes, and regulatory charges. CMs are expected to pass on these benefits to their clients accordingly.

SEBI has sought comments and suggestions on this draft circular, which must be submitted by July 25, 2024.

For further details and to provide feedback, readers are encouraged to contact Regstreet Law Advisors at info@regstreetlaw.com.

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