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Mumbai: Only stronger banks could be chosen for accepting fixed deposits and guarantees that back the trading and settlement in the equity market, according to a proposal under discussion between Sebi and institutions such as stock exchanges and clearing houses.

The idea is being explored to strengthen the market ecosystem amid a surge in trading volumes and faster turnaround of securities and money in the wake of shorter settlement cycles.

The plan, yet to be finalised, would entail laying down a minimum capital or net worth and a floor credit rating criteria that banks will have to meet.

“If implemented, it could almost halve the number of banks giving guarantees and where trading members open FDs.

Understandably, there would be some resistance from the banking industry as some banks could lose business,” a person familiar with the matter told ET. Brokers, serving as clearing members of stock exchanges, place collaterals or margins in the form of FDs, bank guarantees, securities and cash, with stock clearing corporations to facilitate settlement of equity trades in the spot and derivative segments.

The clearing corporations, playing a key role, absorb the settlement risk and act as an intermediary between a broker receiving buy or sell orders from investors and stock exchanges offering the platform where trades are matched.

Concentration limit
Simultaneously, it is also being examined whether a concentration limit — defining how much collateral linked to a single bank would be accepted by a clearing corporation. This is to ensure that the clearing and the settlement system in the stock market is not over-exposed to a handful of banks.

Collaterals like FDs — marked as lien in favour of clearing houses — are generated from a slice of the funds that a broker or trading member receives from investors. Guarantees that are issued in favour of clearing houses are given by banks on the back of funds furnished by brokers. Thus, a clearing corporation has exposure to banks where FDs are created as well as to banks which provide guarantees. A trading member can also double up as a clearing member.

“Across markets, different ideas have cropped for safeguarding systems. For instance, there have been discussions that the core settlement guarantee funds (SGF) of clearing corporations should be spread out across multiple strong banks. Internationally, there have been even suggestions whether clearing corporations should place funds with central banks or receive lines in a crisis,” said an industry person.

An SGF is built to meet contingencies in the event of a default.

Balancing act
Under the circumstances, the Securities and Exchange Board of India (Sebi) has to strike a balance between fixing the qualifying criteria for banks and lowering the concentration risk for clearing corporations in fleshing out the proposal.

In cases where securities held in demat account of brokers are placed as margins, the shares are pledged with the broker which in turn re-pledges them in favour of the clearing house. While some of the risk-mitigation proposals owe their origin to the Yes Bank fiasco in 2020, they are being weighed at a time trades in futures and options have multiplied. Sebi is reportedly also considering increasing the size as well as the methodology to compute the SGF which was last reviewed in 2014.

  • Published On Mar 22, 2024 at 08:56 AM IST

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