Besides reviewing the fund size, the regulator is exploring a possible change in the methodology used to compute the fund requirement. The subject was discussed at the last meeting of the risk management review committee of the Securities and Exchange Board of India (Sebi), a person familiar with the proposal told ET.
The move is believed to be part of an overarching countercyclical regulatory stance to tighten rules when the going is good.
“Different models to calculate the SGF are being looked at to capture future risks in a better way. If a more robust methodology is chosen, the fund size and contributions towards it would rise, though there is no plan to seek contribution from exchange members,” said a source.
Unlike in some markets where members also chip into the SGF, in India, the SGF corpus is formed with contributions from stock clearing corporations and exchanges.Currently, the combined SGF of the NSE and the BSE is around ₹7,000 crore. This is based on the August 2014 framework given by Sebi.Since then, trading volumes in the equity market have grown several times: as against an average daily of ₹19,041 crore in the cash market in 2014, it’s ₹1,20,933 crore now; in the same period, volumes in futures and options have surged from ₹2.79 lakh crore to ₹391 lakh crore.The number of foreign portfolio investors registered with Sebi has risen, accounting for a net inflow of ₹97,349 crore in 2014 compared with ₹1.77 lakh crore in 2023. Also, the settlement cycle in India is becoming shorter with the Sebi set to introduce same-day (or T-plus-zero) settlement, a year after it brought in the T+1 settlement mechanism.
A clearing corporation (CC), housing the SGF, acts as an intermediary between a broker (taking orders from traders and investors to buy or sell securities) and a stock exchange (providing the platform where trades are cut). By taking all counterparty risks on behalf of the exchange, a CC has been at the heart of the clearing and settlement system ever since Sebi ring-fenced the exchange only for trading purposes.
In 2014, the regulator brought in a significant change in determining SGF. As a globally accepted rule, CCs have to maintain sufficient resources to cover losses due to major defaults in the market so as to avoid any systemic risk; and, brokers, serving as clearing members for stock transactions, are required to keep collaterals – in the form of fixed deposits, bank guarantees, securities, and cash – with the CCs.
Such margins from a member form the primary layer of defence for CC against any default. However, since margins were against positions, the concept of ‘core SGF’ was introduced in 2014 as a second layer of defence. Such SGF was not linked to any exposure and was always available in liquid form. A new framework being explored now could lead to further tightening of the rule amid changes in the market.