SEBI issues consultation paperon Clearing Corp interest income
   Date :08-Jul-2024

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MARKET regulator SEBI has issued a consultation paper on the treatment of interest income earned by the clearing corporations from cash collaterals from clearingmembersandupstreamedclient funds.SEBIhadpreviouslymandatedthe upstreaming of all client funds to Clearing Corporations(CCs)atthe 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 beenholdingsubstantialcashcollaterals from Clearing members (CMs) towardssettlementobligationsandmarginmoney, investingordeployingthese 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. ToreviewtheexistingpracticeofinterestorincomeearnedbyCCs on thecash collaterals received from CMs and upstreamed clients' funds, the matter was discussed in the Risk Management ReviewCommittee of SEBI(RMRC),the market watchdog proposes that the funds from CMs and upstreamed client fundsbesegregatedfromCCs’ownfunds at all times. In addition, the regulator also proposed that CCs will be allowed to invest or deploy these funds in highlyliquidfinancialinstrumentswithminimal market and credit risk, in accordance with SEBI’s norms for the Core Settlement Guarantee Fund (SGF) corpus. SEBIalsoproposedthat any interest or income earned fromthese investmentsshouldbeperiodicallydistributed to clearing members or added to the CMs'collaterals,afteradjustingforcosts, taxes, andregulatory charges.
 
Thisbenefit will then be appropriately passed on to the clients by the CMs. However, SEBI clarified that these provisionsdonot apply topay-inshortfalls, interest-free security deposits, or any caseswhere lawsprohibitpayment 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 andthemethodology for allocation of interest or income, etc