Sebi pitches greater role for clearing corporations in settlements

The Securities and Exchange Board of India (Sebi) has proposed sweeping changes to settlement and risk management rules, aiming to hand greater operational responsibility to clearing corporations, eliminate outdated regulations and reduce compliance and reporting requirements for market infrastructure institutions (MIIs).

A Sebi consultation paper issued on Thursday seeks to make it easier for stock exchanges and clearing corporations to operate by updating master circulars governing settlement and risk management. The proposals are part of Sebi’s fifth consultation paper on the regulatory framework for stock exchanges and clearing corporations.

Among the biggest changes is a proposal to make clearing corporations solely responsible for monitoring pay-in shortages and collecting penalties. At present, these responsibilities are split between stock exchanges and clearing corporations, even though clearing corporations have complete visibility of settlement shortfalls.

Sebi has also proposed replacing the current penalty thresholds linked to a broker's base minimum capital with fixed monetary limits or a percentage of net worth, making the framework easier to administer.

The regulator has also proposed replacing references to stock exchanges with clearing corporations in several provisions relating to margin reporting, monitoring shortfalls and collection of penalties, noting that these activities are already handled by clearing corporations in practice, except for certain inspection-related functions carried out by exchanges.

Compliance burden set to ease

Several periodic filings could also disappear. Clearing corporations may no longer need to submit quarterly net-worth certificates signed by their managing directors and annual reports on compliance with international Principles for Financial Market Infrastructures to Sebi.

Instead, Sebi proposes annual certification where already required, immediate reporting only if net worth falls below prescribed levels, and public disclosure of certain information on clearing corporations' websites.

The consultation paper also seeks to remove several provisions that have become redundant following the market's shift to a mandatory T+1 settlement cycle.

Rules governing the transition between T+1 and T+2 settlement, auction schedules under T+2 and procedures requiring brokers to transfer securities to clients would be deleted or rewritten since securities are now credited directly by clearing corporations to investors' demat accounts on the settlement day.

Other proposals include requiring clearing corporations to prepare standard operating procedures for handling unscheduled settlement holidays in consultation with exchanges, while also extending depositories and extending disclosure requirements relating to the Settlement Guarantee Fund across all market segments and removing outdated provisions relating to base minimum capital, the dedicated debt segment and no-delivery periods.