India: Committee Clearing Corporation

The Securities and Exchange Board of India (hereinafter referred as 'SEBI') constituted a Committee, under the Chairmanship of Shri. K V Kamath, to examine the viability of introducing a single clearing corporation (CC) or interoperability between different CCs, as well as issues pertaining to investments, calculation of liquid assets in Net worth of recognised CC and Transfer of Profits by recognised SEs to the fund of recognized CC's. A clearing corporation is An organization associated with an exchange to handle the confirmation, settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses". Based on the decision of the Board taken at its meeting held on August 24, 2015, public comments were sought on the Report of the Committee on Clearing Corporations. The Board on consideration of the recommendations of the Committee and public comments received thereon vide its press release dated 30th November 2015 broadly accepted the recommendation of the board regarding:

SINGLE CLEARANCE COOPERATION AND INTEROPERATABILITY BETWEEN THEM

The committee had recommended that at this juncture, moving to a single CC may not be appropriate for the securities market. Preserving the current market structure and maintaining separate clearing corporations for each exchange would be prudent at this stage. However, SEBI may keep the interoperability option open and consider the proposal for implementation when ground conditions are met, which, inter alia, include clear intent of the participants coming together and having a suitable framework in place to the satisfaction of SEBI.

The Committee, while weighing the options, namely, the present structure of clearing corporation, interoperability or centralized Clearing Corporation observed that while a single clearing corporation could help bring down margin requirements of market participants considerably, it needs to be considered whether this will come at the cost of putting the entire market at risk, amongst other things. Therefore SEBI has not ruled out the possibility of interoperability among different clearance corporations and has left the possibility open subject to establishment of sufficient supporting infrastructure

TRANSFER OF PROFIT BY RECOGNISED STOCK EXCHANGE TO THE FUND OF RECOGNISED CLEARANCE CORPORATION

The Committee had recommended that since the requirement of core Settlement Guarantee Fund (SGF) has already been met, the 25% profit transfer requirement might not be required. The clearing corporation are required to maintain an SGF either separately or jointly, in respect of different clearing segment(s) for such purposes, as may be prescribed. Also, the Risk Management Review Committee (RMRC) of SEBI may review the stress test model, used to determine the Minimum Required Corpus (MRC) of core SGF, for making such departure. With regard to the contribution already set aside by the Stock Exchanges towards the 25% profit transfer requirement, the Committee has recommended that the same may be utilized by exchange to cover the member contribution to the core SGF since this would result in lower transaction costs and would be in the overall interest of the market. SEBI may specify the details in this regard including in respect of contributions already made by CCs on behalf of members.

TRANSFER OF FUNDS BY DEPOSITORIES TO THEIR INVESTOR PROTECTION FUND

The Committee recommended that depositories may transfer 5%, or such percentage as may be prescribed by SEBI from time to time, of their profits from depository operations every year to the Investor Protection Fund since the date of amendment of SEBI (Depositories and Participants) (Amendment) Regulations, 2012 requiring transfer of profits. The percentage of profits to be transferred every year by depositories to the IPF may be reviewed by SEBI on a periodic basis.

The Committee noted that given that both the requirements viz 25% transfer of profits by Exchanges to SGF of CC and the requirements under new SGF guidelines which also required the exchange to mandatorily contribute 25% of the required funds were towards strengthening the SGF. Therefore in order to reduce the cost burden and to remove duplicate actions in law, the above two contributions by the exchange were allowed to be set off against each other. The committee concluded that it would bring clarity and remove ambiguity for the contribution by exchange towards SGF, if one of them is removed.

The committee concluded that it would bring clarity and remove ambiguity for the contribution by exchange towards SGF, if one of them is removed.

ELIGIBLE INVESTMENT INSTRUMENTS

Considering the sensitive and risk-bearing role of the clearing corporations, a clearing corporation, must hold a sufficient amount of liquid net assets preferably funded by equity so that it can continue operations and services as a going concern even if it incurs general business losses, or for the purposes of an orderly winddown of its critical operations and services, where necessary, or for the purpose of absorbing credit risk etc .

The committee approved that apart from government securities and fixed deposits, liquid schemes of debt mutual funds may also be made eligible for investment by recognized CCs and be included in their liquid assets, subject to appropriate investment limits for such investments and any other conditions as may be specified by SEBI

The Ministry of Finance (Department of Revenue) has issued a notification G.S.R.10(E) [F.No.A-12011/02/2014-Ad.ED], dated 6th January, 2016, wherein the Central Government has, exercised its powers under conferred by sub-section (2) of section 37A of the Foreign Exchange Management Act 1999. The said sub-section states that the order of seizure of any foreign exchange, foreign security, or any immovable property, situated outside India, which is suspected to have been held in contravention of section 4 of FEMA 1999, shall be placed before the Competent Authority, appointed by the Central Government, who shall be an officer not below the rank of Joint Secretary to the Government of India by the Authorized Officer within a period of thirty days from the date of such seizure.

Therefore, in exercise of the powers conferred by subsection (2) of section 37A of the Foreign Exchange Management Act 1999, appointed the Commissioner of Customs (Appeals), Delhi, Commissioner of Customs (Appeals), Mumbai-I, Commissioner of Customs (Appeals), Kolkata and Commissioner of Customs (Appeals-I), Chennai to be a Competent Authority under the said Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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