SEBI's Circular on Limited Purpose Clearing Corporation

SEBI's Circular on Limited Purpose Clearing Corporation

The Securities and Exchange Board of India (SEBI) has issued a Circular with the subject being Outsourcing of activities, Business Continuity Plan (BCP) and Disaster Recovery (DR) and Cyber Security and Cyber Resilience framework -Limited Purpose Clearing Corporation(LPCC).

Herein, it has been put forth that SEBI Board in its meeting held on September 29, 2020permitted setting up of a Limited Purpose Clearing Corporation (LPCC) for clearing and settling repo transactions in debt securities and accordingly Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2020, have been notified on October 08,2020(SECC Amendment Regulations 2020).

Further, the LPCC has been permitted to enter into outsourcing agreements with existing Clearing Corporations for the purpose of using their core and critical IT support infrastructure / activities for running the core activities (transaction process, clearing and settlement) of the LPCC and related operations.

For the purpose of execution of repo in corporate bonds, LPCC shall enter into necessary agreements with the Stock Exchanges where it proposes to offer clearing / settlement of repo transactions and their associated Clearing Corporations for continuity purposes.

Additionally, the LPCC has been permitted to have arrangements with any of the existing Clearing Corporations for the purposes of putting in place a BCP and DR mechanism, and Cyber Security.

In respect of the LPCC, the provisions of Circular SEBI/HO/MRD/DP/CIR/P/2017/101 dated September 13, 2017, Circular CIR/MRD/DP/13/2015 dated July 06, 2015, Circular CIR/MRD/CSC/148/2018 dated December 07, 2018 and Circular SEBI/HO/MRD/DMS1/CIR/P/2019/43 dated March 26, 2019, have been modified to the extent as mentioned above.

The Annexures to the Circular mentions that LPCC is permitted to enter into outsourcing agreements with existing Clearing Corporations for the purpose of using their core and critical IT support infrastructure / activities for running the core activities (transaction process, clearing and settlement) of the LPCC and related operations.

For the purpose of execution of repo in corporate bonds, the LPCC shall enter into necessary agreements with Stock Exchanges and their associated Clearing Corporations (CCs) for continuity purposes. The transactions would be executed on the platform of exchanges.

As part of the risk management process, the LPCC would define the risk management parameters, such as eligible bonds ISINs, applicable margins, type of collateral, applicable haircuts, quantum of collateral, etc.

Further, for the purpose of margin blocking, collateral management, pay-in and pay-out of funds and securities, separate bank and demat account would be opened by the LPCC.

For clearing and settlement of repo transactions based on the parameters defined by the LPCC, and other related processes /operations, the infrastructure of the existing CCs shall be used. For availing such facility / service, the LPCC shall enter into comprehensive outsourcing agreements with the existing CCs. The Selection Process, Fees & Charges, Role and Responsibility pertaining to such have also been put forth in the Annexure.

In order to ensure compliance with the guidelines for Business Continuity Plan (BCP) and Disaster Recovery (DR),prescribed vide Circular SEBI/HO/MRD/DMS1/CIR/P/2019/43 dated March 26, 2019, LPCC is permitted to have arrangements with any of the existing Clearing Corporations who are in compliance with the existing regulatory BCP/DR requirements.

However, for any issues / disputes arising on account of such arrangement, the LPCC shall be liable. Hence, the LPCC shall incorporate necessary provision into its agreement with the service providers for its BCP/DR arrangement with them.

In order to ensure compliance with the requirements relating to Cyber Security and Cyber Resilience framework prescribed vide Circular CIR/MRD/DP/13/2015 dated July 06, 2015 and Circular CIR/MRD/CSC/148/2018 dated December 07, 2018, LPCC has been permitted to have outsourcing arrangements for cyber security with any of the existing Clearing Corporations for the purposes of Cyber Security. For any issues / disputes arising on account of such arrangement, LPCC would be liable.