Capital markets regulator Sebi on Friday laid out a framework for the orderly winding down of critical operations and services of clearing corporations (CC).

Under this framework, CCs will have to develop standard operating procedures (SOPs) outlining how their essential services will be performed orderly so as not to cause any disruption to the financial system should any voluntary or involuntary termination be triggered.

Under the framework, circumstances have been identified that may prevent the clearing firm from providing its critical services and may lead to a tapering of its essential operations and services. In a circular, the Securities and Exchange Board of India (Sebi) said that reasons for closing a CC could be either voluntary or involuntary.

Involuntary winding up will depend on regulatory action, losses from default by clearing members and losses from other factors such as significant operating expenses, legal fees or investment losses. As per regulatory requirements, CCs need to meet an annual clearing turnover of at least Rs 1,000 crore per annum on an ongoing basis. If the requirements are not satisfied for two consecutive years, CC will be obliged to withdraw and apply for an orderly shutdown of its critical operations and services. Threshold conditions do not apply to CC for five years from the date of the grant of accreditation.

If the CC does not apply for voluntary winding up after exceeding the minimum turnover threshold, Sebi may compulsorily terminate the recognition of the CC by applicable laws.

The regulator has asked the CC to develop a policy framework containing SOPs duly approved by its management board and to publish it on its website within 90 days. To identify operations and services that may be classified as critical, CCs must consider their risk profile, operations, organizational structure, financial resources, business practices, interrelationships and interdependencies.

“Since the timely clearing and settlement of transactions is a core function of CCs, businesses and services such as collateral management, risk management, clearing, and settlement should be considered critical,” Sebi said. In addition, due to the clearing and settlement of transactions, the contractual obligations of CCs with clearing members, stock exchanges, depository institutions and other CCs are necessarily classified as key.

Regarding the SOP, the regulator said that upon triggering the scenario, CC needs to issue a notification of the closure with prior approval from Sebi.

SOPs should include details of infrastructure and premises as well as technical systems, including backup and outsourced activities that need to be retained or continued to allow for an orderly reduction of critical operations and services.

It will also contain details of key staff and their roles and responsibilities. They will be retained and responsible for developing and ongoing monitoring of critical operations and services once the orderly shutdown process has been initiated. The CC will include operational models related to the transfer or liquidation of positions and collateral, with detailed consideration of applicable interoperable or non-interoperable scenarios, while developing its policies for the orderly termination of critical operations and services.

Sebi said the number of assets available for distribution would be derived upon payment of statutory fees, including applicable taxes and payments to regulators, return of refundable collateral and member deposits of clearing members (CMs), return to warehouse services provider’s deposits, if any, and unused core SGF contributions from CM and stock exchanges.

Upon withdrawal, CC must also donate 20% of its assets to the Sebi Investor Protection and Education Fund (IPEF) to settle any claims and ccs related to pending arbitration cases, unresolved complaints or grievances.

CC’s Regulatory Oversight Committee (ROC) will oversee the implementation of processes related to the orderly shutdown of critical businesses and services and will submit a report to Sebi.

In a separate circular, Sebi said the rules related to the “Principles for Financial Market Infrastructures” would apply to AMC Repo Clearing Limited. It requires clearing firms and depositories to comply with the Principles for Financial Market Infrastructures (PFMI) issued by the Payment and Settlement Systems Committee and the International Organization of Securities Commissions (IOSCO).

Previously, Sebi recognized AMC Repo Clearing Limited as a clearing company in January this year for clearing and settling repo and reverse repo transactions of debt securities traded on stock exchanges.

In October 2020, Sebi established a limited-purpose clearing company to clear and settle repurchase debt securities transactions.