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Understand what the Core Settlement Guarantee Fund is and how it ensures smooth clearing and settlement in financial markets.
The Core Settlement Guarantee Fund (Core SGF) is an important safeguard mechanism within India’s financial market infrastructure. It ensures that trades executed on stock exchanges are settled smoothly, even if a trading member defaults on their obligations.
By guaranteeing settlement, the Core SGF helps maintain market integrity, investor confidence, and systemic stability.
A Settlement Guarantee Fund (SGF) is a pool of funds maintained by clearing corporations.
Its primary purpose is to guarantee the completion of settlements in case one or more clearing members fail to meet their payment or securities delivery obligations.
In simpler terms, if a broker defaults, the SGF ensures that the counterparty still receives their due securities or funds, keeping the settlement process uninterrupted.
Key Objectives:
To mitigate counterparty risk.
To ensure financial market stability.
To protect investors and maintain orderly settlements.
The Core Settlement Guarantee Fund (Core SGF) is the minimum, dedicated portion of the SGF that clearing corporations must maintain at all times.
This fund acts as the final financial safety net to meet settlement obligations in the event of member default.
According to SEBI guidelines, the Core SGF can be used only after other resources such as member margins and default funds are exhausted.
Components of the Core SGF typically include:
Contributions from the clearing corporation.
Contributions from stock exchanges.
Any income earned from the fund’s investment.
This ensures the market has a permanent capital buffer against settlement risks.
Here’s how the Core SGF differs from the broader Settlement Guarantee Fund in structure and purpose:
| Aspect | Settlement Guarantee Fund (SGF) | Core Settlement Guarantee Fund (Core SGF) |
|---|---|---|
Definition |
A fund created to guarantee trade settlement in case of member default. |
The minimum, permanent portion of the SGF dedicated for settlement risk coverage. |
Usage |
Used to handle member defaults and settlement shortfalls. |
Used only when other resources (like margins and default funds) are exhausted. |
Funding Source |
Clearing members, clearing corporations, exchanges. |
Clearing corporation’s own contribution and income from investments. |
Objective |
Provides overall settlement assurance. |
Acts as a final capital buffer for systemic safety. |
Here’s a step-by-step look at how the Core SGF functions during normal operations and in the event of a member default:
Collection & Maintenance:
Clearing corporations collect contributions from themselves and exchanges to build and maintain the Core SGF.Default Event:
If a clearing member fails to meet settlement obligations (e.g., payment shortfall or non-delivery of securities), the default is declared.Default Handling Sequence:
The fund utilisation follows a waterfall structure, typically in this order:
Member’s margin and collateral
Default fund contribution
Core SGF
Fund Replenishment:
After usage, the clearing corporation must replenish the Core SGF to the prescribed level before continuing operations.This structure ensures smooth trade settlement without disruption to the market.
The Core SGF plays an important role in financial market safety:
Prevents Settlement Failures:
Ensures settlements are completed even if a member defaults.
Maintains Market Integrity:
Builds investor and participant confidence in the exchange system.
Protects Counterparties:
Safeguards all trading members and investors from counterparty risks.
Enhances Financial Stability:
Reduces systemic risk by providing a secure backup for large-scale defaults.
When a member defaults, the following steps typically occur:
Identify the Default:
The clearing corporation declares a member as a defaulter for failing to meet obligations.
Utilise Member’s Collateral:
Margins and deposits of the defaulting member are first used to meet shortfalls.
Draw from the Default Fund:
If shortfalls remain, the default fund (contributed by other members) is used next.
Access the Core SGF:
The Core SGF is used only after all other layers of protection are exhausted.
The Core SGF framework is governed by SEBI circulars and clearing corporation regulations, primarily under:
SEBI (CCP) Regulations, 2018
SEBI Circular No. SEBI/HO/MRD/DSA/CIR/P/2018/123 dated August 2018
Key regulatory provisions:
Every clearing corporation must establish a Core SGF for each segment it clears.
The composition, usage, and replenishment process must follow SEBI-prescribed rules.
Periodic reporting and audits ensure fund adequacy and compliance.
SEBI oversees fund sufficiency and utilisation through regular inspections.
While the SGF and Core SGF systems are robust, they face certain challenges:
High Capital Requirement: Maintaining large funds increases operational costs for clearing corporations.
Limited Utilisation: The Core SGF is rarely used, leading to idle capital concerns.
Default Correlation Risk: Multiple defaults during market stress may exceed available fund limits.
Investment Returns: Conservative investment norms may limit fund growth.
Regulatory Complexity: Strict compliance adds administrative and monitoring overheads.
A robust settlement framework is vital for maintaining confidence in financial markets. The Core Settlement Guarantee Fund (Core SGF) serves as an important safeguard within India’s clearing and settlement ecosystem.
Things to keep in mind:
The Core Settlement Guarantee Fund is a mandatory capital reserve designed to ensure market stability and protect investors during member defaults.
It acts as a final safety net after other default protection measures fail.
SEBI regulations ensure that clearing corporations maintain, utilise, and replenish the fund responsibly.
The Core SGF reinforces India’s position as a secure and reliable financial marketplace.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The Core Settlement Guarantee Fund is a dedicated financial reserve maintained by clearing corporations to ensure that trade settlements are completed even if a clearing member defaults. It serves as a key safeguard for market integrity and stability.
Contributions to the Core SGF come from the clearing corporation itself, the recognised stock exchanges, and income earned from investing the fund. These sources collectively ensure that the fund remains adequately capitalised.
The fund guarantees settlement by covering any shortfall that arises when a clearing member defaults. It ensures counterparties receive the funds or securities due to them, thereby maintaining trust and smooth functioning in the clearing and settlement system.
The regular SGF represents the total pool of settlement resources available to manage defaults, while the Core SGF is the minimum, permanent portion of this pool. It acts as the final and most secure financial layer to guarantee settlement completion.
In India, clearing corporations such as NSE Clearing Ltd. (NSCCL) and Indian Clearing Corporation Ltd. (ICCL) manage the Settlement Guarantee Funds. Their operations are regulated and monitored by the Securities and Exchange Board of India (SEBI).
If a member defaults, the clearing corporation first uses the member’s margins and contributions to the default fund. If these are insufficient, the Core SGF is utilised to ensure that settlements are honoured without disruption.
SEBI requires every clearing corporation to maintain a Core SGF as a permanent reserve, disclose its utilisation, and promptly replenish it after any use. This ensures continuous market protection and compliance with risk management standards.
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Posted on 19 Dec
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