𝐒𝐄𝐁𝐈 𝐃𝐑𝐀𝐅𝐓 𝐂𝐈𝐑𝐂𝐔𝐋𝐀𝐑: 𝐓𝐑𝐄𝐀𝐓𝐌𝐄𝐍𝐓 𝐎𝐅 𝐈𝐍𝐓𝐄𝐑𝐄𝐒𝐓 𝐈𝐍𝐂𝐎𝐌𝐄 𝐎𝐍 𝐂𝐀𝐒𝐇 𝐂𝐎𝐋𝐋𝐀𝐓𝐄𝐑𝐀𝐋𝐒 𝐑𝐄𝐂𝐄𝐈𝐕𝐄𝐃 𝐁𝐘 𝐂𝐋𝐄𝐀𝐑𝐈𝐍𝐆 𝐂𝐎𝐑𝐏𝐎𝐑𝐀𝐓𝐈𝐎𝐍𝐒 𝐅𝐑𝐎𝐌 𝐂𝐋𝐄𝐀𝐑𝐈𝐍𝐆 𝐌𝐄𝐌𝐁𝐄𝐑𝐒 𝐀𝐍𝐃 𝐔𝐏𝐒𝐓𝐑𝐄𝐀𝐌𝐄𝐃 𝐂𝐋𝐈𝐄𝐍𝐓 𝐅𝐔𝐍𝐃𝐒

SEBI has released a draft circular for public feedback regarding the handling of interest income by 𝐂𝐥𝐞𝐚𝐫𝐢𝐧𝐠 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐢𝐨𝐧𝐬 (CCs) on cash collaterals obtained from 𝐂𝐥𝐞𝐚𝐫𝐢𝐧𝐠 𝐌𝐞𝐦𝐛𝐞𝐫𝐬 (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 𝐒𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐂𝐨𝐧𝐭𝐫𝐚𝐜𝐭𝐬 (𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐢𝐨𝐧) (𝐒𝐭𝐨𝐜𝐤 𝐄𝐱𝐜𝐡𝐚𝐧𝐠𝐞𝐬 𝐚𝐧𝐝 𝐂𝐥𝐞𝐚𝐫𝐢𝐧𝐠 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐢𝐨𝐧𝐬) 𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐢𝐨𝐧𝐬, 2018, the definitions for key terms are as follows:

𝐒𝐞𝐜𝐭𝐢𝐨𝐧 2(𝐝) 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.

𝐒𝐞𝐜𝐭𝐢𝐨𝐧 2(𝐞) defines a Clearing Member as an entity with clearing rights in any recognized clearing corporation.

SEBI’s 𝐑𝐢𝐬𝐤 𝐌𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭 𝐑𝐞𝐯𝐢𝐞𝐰 𝐂𝐨𝐦𝐦𝐢𝐭𝐭𝐞𝐞 (SEBI RMRC) has discussed the current practice of CCs earning interest income on cash collaterals from CMs and client funds. Key observations include:

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

·      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.

·      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.