INDIA ICC has created a dedicated "Default Fund", which would be readily and unconditionally available to meet settlement obligations of INDIA ICC in case of Clearing / Custodian member(s) ("CMs") failing to honour settlement obligation.
The corpus of the fund may be utilised to meet out, inter-alia, the contingencies arising on account of failure of any member(s). The risk or liability to the fund would depend on various factors such as trade volume, open positions, maximum settlement liability of the members, the history of defaults, capital adequacy of the members, the degree of safety measures employed by the INDIA ICC, etc. In order to assess the fair quantum of the corpus of Default Fund, INDIA ICC would consider the following factors:
- Risk management system in force.
- Current and projected volume/turnover to be cleared and settled by INDIA ICC on guaranteed basis.
- Track record of defaults of members (number of defaults, amount in default).
However, Minimum Default Fund ("MDF") size for would be subject to the following:
- The MDF shall be fixed for a month.
- By 15th of every month, INDIA ICC shall review and determine the MDF for next month based on the results of daily stress tests of the preceding month. (For example, by 15th February, INDIA ICC shall determine MDF for March based on results of various stress tests conducted in January). INDIA ICC shall also review and determine by 15th of every month, the adequacy of contributions made by various contributors and any further contributions to the Default Fund required to be made by various contributors for the next month.
- For every day of the preceding month (i.e., January as per example in (ii) above), uncovered loss numbers shall be estimated by the various stress test scenarios (with or without weightages) for credit risk conducted by the INDIA ICC to arrive at the worst case loss number for the day.
- Average of all the daily worst case loss numbers determined in (iii) above shall be calculated.
- The MDF for next month (i.e., March as per example in (ii) above) shall be highest of MDFs for preceding 3 months.
- Contribution towards Default Fund in excess of MDF may be released by INDIA ICC to the contributors on a pro-rata basis.
At any point of time, the contributions of various contributors to Default Fund of any segment shall be as follows:
- To begin with, the MDF shall be atleast 10% of the networth of INDIA ICC.
- Clearing Corporation and Stock Exchange contribution: INDIA ICC and INDIA INX (for settlement of trades of which, the Default Fund has been constituted) contribution to Default Fund shall be at least 10% of the Default Fund.
- Clearing Member (CM) primary contribution: INDIA ICC may seek risk based contribution from CMs to the Default Fund subject to the following conditions:
- That total contribution from CMs shall not be more than 90% of the Default Fund,
- That no exposure shall be available on Default Fund contribution of any CM, and
- That required contributions of individual CMs shall be pro-rata based on the risk they bring to the system as per the methodology defined by INDIA ICC from time to time.
INDIA ICC shall have the flexibility to collect CM primary contribution either upfront or staggered over a period of time. In case of staggered contribution, the remaining balance shall be met by INDIA ICC to ensure adequacy of total Default Fund corpus at all times. Such INDIA ICC contribution shall be available to INDIA ICC for withdrawal as and when further contributions from CMs are received.
INDIA ICC shall ordinarily accept cash collateral (in foreign currencies as specified by INDIA ICC) for Default Fund contribution. However, INDIA ICC may specify other liquid forms of collateral it may accept towards CM contribution. INDIA ICC shall adhere to specific guidance which may be issued by SEBI from time to time in this regard.
INDIA ICC shall follow prudential norms of Investment policy for Default Fund corpus to ensure that Default Fund corpus is invested in liquid financial instruments with minimal market and credit risk and is capable of being liquidated rapidly with minimal adverse price effect.
Requisite contributions to Default Fund by various contributors for any month shall be made by the contributors before start of the month.
In the event of usage of Default Fund during a calendar month, INDIA ICC may call for additional funds to replenish the Default Fund atleast to the extent of MDF.
In case there is failure on part of some contributor(s) to replenish its (their) contribution, same shall be immediately met, on a temporary basis during the month, in the following order:
- By INDIA ICC
- By INDIA INX (for settlement of trades of which, the Default Fund has been constituted)
The monthly review results shall be communicated to the Risk Management Committee and the Governing Board of INDIA ICC. The exception reporting shall be made to SEBI detailing the outcome of the review by INDIA ICC's Governing Board, including steps taken to enhance the Default Fund.
- Monies of defaulting member (including defaulting member's primary contribution to Default Fund(s))
- INDIA ICC and Exchange's contribution to Default Fund to the extent of at least 5% of the MDF
- Remaining Default Fund: INDIA ICC contribution, Exchange contribution and non-defaulting members' primary contribution to Default Fund on pro-rata basis.
- Remaining INDIA ICC resources
- Capped additional contribution by non-defaulting members of the segment (subject to a cap of USD 50,000)*.
- Any remaining loss to be covered by way of pro-rata haircut of variation margin gains for the settlement day of the default(s)
*In case of any such additional contribution being called, INDIA ICC may not call for additional contribution from such members for next 30 calendar days. However, INDIA ICC may call for contribution from such members towards Default Fund on account of any increase in risk to the CCP (due to increase in positions, volatility, price movements, or any other risk factor) on account of those members.
Currently, INDIA ICC maintains a default fund of USD 8,75,926.05.