The Securities and Exchange Board of India vide its notification dated 1st July 2020 has issued Standard Operating Procedure for stock exchanges, clearing corporations and depositories to deal with possible defaults by trading or clearing members.
The SOP lays down the actions to be initiated by the SEs / CCs / Depositories within a time frame after detection of the early warning signals as laid out in the Circular dated December 17, 2018 and once the TM is declared defaulter, the proceedings shall be in compliance with the bye laws, rules and regulations of SE / CC respectively.
Apart from the early warning mechanism, SEBI has also mentioned certain other triggers for initiating actions, including when there is a shortage of funds or securities payable to the clients by Rs 10 crore. Stock exchanges might have different criteria in terms of the quantum.
When a show cause notice is issued for declaring trading or clearing member as a defaulter by any exchange, its subsidiary and associate companies which are also members on other segments, exchange or clearing corporation should also be put in suspension mode. Further, all their open positions shall be squared off and their assets shall be frozen.
Stock exchanges have been asked not to expel a trading member until the default proceedings are completed.
Further the stock exchanges, clearing corporations and depositories shall follow the timelines provided in the SoP with respect to each action. In case of any deviation, reasons for the same have to be recorded.
The SoP enumerates the minimum action which shall be initiated by the respective SEs/ CCs / Depositories in accordance with the law with effect from August 01, 2020. However, the respective SEs / CCs / Depositories are free to initiate any other actions as may be necessary for compliance with their bye-laws / rules/regulations and/or to protect the interest of investors.
Click here to read the notification.
