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Segregation and Monitoring of Collateral at Client Level - SEBI - SEBI/HO/MRD2_DCAP/CIR/2021/0598

Extract

..... the following framework for segregation and monitoring of collateral at client level. Reporting Mechanism by TMs and CMs 4. With a view to providing visibility of client-wise collateral (for each client) at all levels, viz., TM, CM and Clearing Corporation (CC), a reporting mechanism, covering both cash and non-cash collateral, shall be specified by the CCs. Details in respect of the same are as under: a. The reporting structure shall entail disaggregated information (segment-wise and asset type wise break-up) of each client collateral in the following manner: TM shall report disaggregated information on collaterals up to the level of its clients to the CM. CM shall report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the Stock Exchanges (SEs) and CCs in respect of each segment. b. The details to be submitted in the report shall essentially cover the following information, in order to provide a holistic view of the entire client collateral at various levels up to the level of CC: TM → CM CM →SE & CC Client collateral received by TM Client collateral received by TM Client collateral retained by TM Cl .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... break-up of such collateral provided by TM is equal to the total value of such collateral provided by TM, and that the allocation of such collateral to any entity as reported to the CC does not exceed the allocation of collateral reported by the TM for that entity. 11. The amount of collateral allocated shall not exceed the amount of collateral received by the TM/CM from the client and reported as such under the reporting mechanism (refer Para 4), excluding the securities collateral re-pledged to CC through margin pledge mechanism. Further, the sum of client collateral retained by the TM/CM and client collateral passed on to CM/CC shall equal the amount of collateral received by the TM/CM from the client. Also, the allocation of collateral at CC shall not be lower than the amount of collateral (except securities collateral re-pledged to CC) reported as having been passed on by the CM to the CC. The CC shall have appropriate validations in place in respect of allocations and reporting done by CMs. Further, CMs shall also perform validations at their end in respect of allocations and reporting done by TMs. 12. An illustration is provided at Annexure-1 regarding permitted and non-perm .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... a client may have allocation of cash equivalent, less than the value of non-cash collateral provided by the client. In other words, the minimum 50% cash equivalent collateral requirement may not be applied at the client level. For the purpose of monitoring of at least 50% cash-equivalent collateral at the level of CM, the excess cash-equivalent collateral of a client shall not be considered for other client or for proprietary account of TM/CM. However, the excess cash-equivalent collateral of proprietary account of TM/CM can be considered for clients trading/clearing through them, for the purpose of monitoring minimum 50% cash-equivalent requirement. 19. An illustration of the above requirement is provided at Annexure-3. Blocking of Margins 20. The procedure for blocking of margins only specifies the order of blocking of collateral available with the CC. There shall be no change in the requirement of collection of upfront margins by the TM/CM. The TM/CM shall be required to ensure that sufficient collateral is allocated to clients to cover their margin requirements (refer Para 15 and 16). 21. The terms “Client Collateral”, “TM Collateral”, “CP Collate .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... at Annexure-5. 28. In case of CP trades executed by TMs, the margin shall be blocked in the following order- (i) CP collateral through the executing TM, if any, (ii) residual margin from the proprietary collateral of the executing TM, and (iii) residual margin from the proprietary collateral of the CM of the executing TM. Upon confirmation of such trades by CM of the CP, the margin so blocked prior to the confirmation shall be released, and shall be blocked in the following order- (i) CP collateral through the confirming CM, and (ii) residual margin from the proprietary collateral of the confirming CM. In case of CP trades, the requirement to ensure that sufficient collateral is allocated to clients to cover their margin requirements shall be on the confirming CM. However, if the trade is confirmed under the auto approval facility provided by the CC, then margin shall be directly blocked in the following order- (i) CP collateral through the confirming CM, and (ii) residual margin from the proprietary collateral of the confirming CM. Change of Allocation 29. CMs shall be permitted to change the allocation of collateral deposited with the CC, subject to the value allocated to any cli .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... s, CC shall provide them opportunity for either porting of their positions and collateral to another CM or immediate return of their collateral. 39. Portability of Positions and Collateral: a. Entities desirous of availing the facility of portability shall be required to have established alternative trading/clearing arrangements with other TMs/CMs other than the defaulting CM. b. If any pay-out is due to such entities, such pay-out shall be made to the entities. As a result, the amount of such pay-out shall be added to the pay-in shortfall of the defaulting CM. 40. Immediate return of collateral: a. Collateral of such entities shall only be utilized to the extent of losses due to liquidation of their respective positions, and the remaining collateral shall be returned, along with the pay-out due to such entities, if any. As a result, the amount of such pay-out shall be added to the pay-in shortfall of the defaulting CM. 41. In some circumstances, it may be desirable to liquidate the positions and even the collateral, since both are subject to risks. Under such circumstances, not closing out positions/collateral to allow for portability may lead to accumulation of losses. Considerin .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... losses shall be recovered from the collateral of the TM/clients/CP available, if any. Any shortage in the collateral of such TM/clients/CP shall be met by applying the default waterfall of the CC. iv. In case of any defaulted obligations attributed to a TM in Para (iii) above (and in turn to its clients), the process enunciated above at Para (ii) and (iii) above for a defaulting CM and its constituents shall apply, mutatis mutandis, to the TM. e. The aforesaid pro-rata attribution of shortages shall be provisional. The actual attribution of shortages to clients shall be done in Stage-4. f. In case there is any profit to a TM/client/CP during the close-out process, such close-out profit shall be considered as pay-out due to the TM/client/CP. 43. An Illustration on the procedures to be followed in the Stage-2 and the Stage-3 are given at Annexure-7. Stage 4: Identification of defaulting clients and final appropriation of collateral 44. The procedure for verification and settlement of claims of constituents of defaulting CM shall be as follows: a. The process for identification of defaulting TM/CP/clients and the return of collateral of non-defaulting TM/CP/clients shall be administer .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... osses in closing-out open positions and the settlement obligations due from clients of the TM shall be appropriated first from the allocated collateral (as per allocation provided by TM to CM, including deemed allocated) and securities collateral provided through margin pledge/ re-pledge to the level of CM/CC of respective clients. Any residual losses as well as the losses in closing-out open positions and the settlement obligations of the TM proprietary account shall be appropriated from the TM proprietary collateral. In case of TM proprietary collateral being insufficient, the losses shall not be appropriated from any other constituent of the CM or any constituent of the defaulting TM. d. After the above utilization towards losses in closing-out open positions of the defaulting TM (and clients under the TM) and net settlement shortfall, all remaining collateral/funds received from the defaulting TM (lying with CM/CC) shall be provided by the CM to the Stock Exchanges. e. Since the TM will be leading to default, the Stock Exchanges shall institute relevant applicable procedures against the TM as per existing regulatory provisions, byelaws, rules and regulations of the Stock Exchan .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... ot are provided below: Sl. Allocation Comments 1 Prop 2 Cr Permitted, since total ₹ 4 cr is allocated among clients and allocations to individual clients do not exceed the respective collateral provided by them. Client-1 1 Cr Client-2 1 Cr Client-3 1 Cr Client-4 1 Cr 2 Prop 2 Cr Permitted, since total ₹ 4 cr is allocated among clients and allocations to individual clients do not exceed the respective collateral provided by them. Client-1 2 Cr Client-2 2 Cr 3 Prop 2 Cr Permitted, since total ₹ 4 cr is allocated among clients and allocations to individual clients do not exceed the respective collateral provided by them. Client-2 3 Cr Client-3 0.5 Cr Client-4 0.5 Cr 4 Prop 3 Cr Not permitted, client collateral allocated as proprietary. Total collateral received from clients does not equal amount with the member plus amount allocated. Client-1 2 Cr Client-3 1 Cr 5 Prop 2 Cr Not permitted, allocation to Client-3 is in excess from the collateral received from the client. Client-2 2 Cr Client-3 2 Cr 6 Client-1 2 Cr Permitted, proprietary collateral can be allocated as client collateral provided the allocated amount does not exceed the actual collateral received from the .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... rop 300 200 100 0 TM-2 Cli-4 70 90 0 20 TM-2 Cli-5 50 100 0 50 Considering TM-1, the excess cash-equivalent collateral of TM-1 Cli-2 cannot be used to offset the excess non-cash collateral of TM-1 Cli-1 and TM-1 Cli-3. Therefore, there will be excess non-cash collateral to the extent of 80 (50 for Cli-1 and 30 for Cli-3) under TM- 1. Considering TM-2, the excess proprietary cash-equivalent collateral of TM-2 can be used to offset the excess non-cash collateral of TM-2 Cli-4 and TM-2 Cli-5. Therefore, there will be no excess noncash collateral under TM-2. Summary of excess cash-equivalent and excess non-cash collateral under CM prop, TM- 1 and TM-2 would be as under: Entity Excess Cash-eq Excess noncash CM Prop 60 - TM-1 - 80 TM-2 30 - The excess cash-equivalent collateral of TM-2 cannot be used to offset the excess non- cash collateral of TM-1. However, the excess cash-equivalent collateral of CM Prop can be used to offset excess non-cash collateral of TM-1. Therefore, the overall excess non- cash collateral will be 20, for TM-1. Entity Excess noncash TM-1 20 The benefit of this excess non-cash collateral (20) will not be available under TM-1. The entities who will get benefit woul .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... o the respective client. Annexure-5: Monitoring of risk reduction mode Suppose the total collateral (allocated collateral plus securities collateral placed through margin pledge/ re-pledge to CC) available against various entities, along with their margin obligations, are as given below. CM TM Client Collateral (Rs) Margin (Rs) CliMrgn>90% (Rs) CM-1 - Prop 1200 800 - CM-1 TM-1 Prop 500 400 - CM-1 TM-1 Client-1 800 780 60 CM-1 TM-1 Client-2 500 450 0 CM-1 TM-1 Client-3 400 380 20 CM-1 TM-2 Prop 500 200 - CM-1 TM-2 Client-4 1000 920 20 CM-1 TM-2 Client-5 1000 880 0 TM level monitoring In the above table, “CliMrgn>90%”, or client margin in excess of 90%, has been calculated as margin for the client less 90% of the client collateral. Risk reduction mode monitoring for TM shall be based on assessment of [TM Prop Margin + CliMrgn>90%] against the [TM Prop collateral]. Accordingly, margin utilization percentage of TM1 and TM2 would be as under: Margin utilization percentage of TM1 = [400 + (60 + 0 + 20)] /500 = 96% Margin utilization percentage of TM2 = [200 + (20 + 0)] /500 = 44% In other words, for TM1, margin of ₹ 30 is in excess of 90% of its prop collateral .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... collateral provided through margin pledge/re-pledge to the level of CC): Entity (Pay-in)/ Pay-out (Rs) Collateral (Rs) Position closeout loss (Rs) Remaining Collateral (Rs) Prop (3 crore) 10 crore 4 crore 6 crore Client-1 (3 crore) 10 crore 3 crore 7 crore Client-2 (3 crore) 15 crore 4 crore 11 crore Client-3 2 crore 15 crore 2 crore 13 crore Client-4 2 crore 3 crore 1 crore 2 crore Net Pay-in 5 crore Shortfall 5 crore Scenario 1: All pay-out clients establish not being in default Suppose Client-3 and Client-4 establish within the pre-specified time period that they are not in default, do not have debit balance/dues towards the member and have not received the pay-out due. The remaining collateral of Client-3 and Client-4 (₹ 13 crore and ₹ 2 crore respectively), along with the pay-out for the clients (₹ 2 crore each), shall be provided to the clients. The settlement shortfall would now be ₹ 9 crore (₹ 5 crore shortfall in net pay- in, plus ₹ 4 crore of pay-out made to Client-3 and Client-4). The settlement shortfall of ₹ 9 crore shall be first adjusted with the SCM proprietary pay-in obligation of ₹ 3 crore. Excess remaining proprieta .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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..... hortage shall be attributed to Client-1). Annexure-8: Procedures to be followed in Stage-4 Illustration 1: Suppose an SCM had no proprietary positions, and the net pay-in obligations were based on five clients. There was a pay-in shortfall of ₹ 300, against the net pay-in of ₹ 600. Suppose none of the clients could establish within the pre-specified time period of not being in default, not having debit balance/dues towards the member and not having received the pay-out due. Assume there is no position close-out loss. The pay-in shortfall of ₹ 300 would be attributed during the Stage 3 on a pro-rata basis from the clients having pay-in obligations. This would be utilized from their available collateral (the available collateral shown against different entities comprises of both allocated collateral (including deemed allocated) and value of securities collateral provided through margin pledge/re-pledge to the level of CC). Entity (PI) / PO (Rs) Collateral (Rs) Utilized Collateral (Rs) Remaining Collateral (Rs) Client-1 150 200 0 200 Client-2 150 100 0 100 Client-3 -300 300 100 200 Client-4 -300 300 100 200 Client-5 -300 300 100 200 Suppose the actual client defaults .....

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Segregation and Monitoring of Collateral at Client Level - SEBI

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