SEBI proposes guidelines for handling Clearing Corporations' interest income from client funds

Markets regulator SEBI has issued a consultation paper on the treatment of interest income earned by the clearing corporations from cash collaterals from clearing members and upstreamed client funds.

SEBI had previously mandated the upstreaming of all client funds to Clearing Corporations (CCs) at the end of the day, allowing these funds to be upstreamed only in the form of cash, fixed deposit liens, or mutual fund overnight scheme pledges.

In its consultation paper, the regulator noted that clearing corporations have been holding substantial cash collaterals from Clearing members (CMs) towards settlement obligations and margin money, investing or deploying these funds to earn interest or income.

However, the collaterals held by CCs, are not owned by them and are instead held in a fiduciary capacity as per regulatory requirements.

To review the existing practice of interest or income earned by CCs on the cash collaterals received from CMs and upstreamed clients' funds, the matter was discussed in the Risk Management Review Committee of SEBI (RMRC), the market watchdog proposes that the funds from CMs and upstreamed client funds be segregated from CCs' own funds at all times.

In addition, the regulator also proposed that CCs will be allowed to invest or deploy these funds in highly liquid financial instruments with minimal market and credit risk, in accordance with SEBI's norms for the Core Settlement Guarantee Fund (SGF) corpus.

SEBI also proposed that any interest or income earned from these investments should be periodically distributed to clearing members or added to the CMs' collaterals, after adjusting for costs, taxes, and regulatory charges. This benefit will then be appropriately passed on to the clients by the CMs.

However, SEBI clarified that these provisions do not apply to pay-in shortfalls, interest-free security deposits, or any cases where laws prohibit payment of interest.

The regulator has sought public comments and suggestions till July 25, the Securities and Exchange Board of India (SEBI) said in its consultation paper on July 5.

In order to ensure uniformity, CCs will publish the procedures for operationalization of these requirements, including adjustment of any costs, taxes, regulatory charges, if any and the methodology for allocation of interest or income, etc.

Further, SEBI advised CCs to put in place necessary systems for implementation of the norms, make bye-laws, rules and regulations, and bring the provisions of this circular to the notice of market participants (including investors) and also to disseminate the same on their website.