InvestorQ : What is the role of the Settlement Guarantee Fund (SGF) in the stock exchange?
prachi Patwardhan made post

What is the role of the Settlement Guarantee Fund (SGF) in the stock exchange?

Answer
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2 years ago


We know that in the stock exchange there is no counterparty risk because all trades are counter-guaranteed by the clearing corporation. That means; for every trade that takes place on the stock exchange in equity, futures or options; the clearing corporation acts as the counterparty. So if A is a buyer and B is a seller then actually A buys from the clearing corporation and B sells to the clearing corporation. But that raises a bigger question. On what basis does the clearing corporation guarantee trades. Is it backed by a large corpus or fund? That is where the Settlement Guarantee Fund (SGF) enters the picture.
The Settlement Guarantee Fund provides a cushion for any residual risk and operates like a self-insurance mechanism wherein members themselves contribute to the fund. In the event of a trading member failing to meet his settlement obligation, then the fund is utilized to the extent required for successful completion of the settlement. This has eliminated counter-party risk of trading on the Exchange. The market has full confidence that settlement shall take place in time and shall be completed irrespective of default by isolated trading members. This is one of the major reasons we have not seen any exchange level default in the BSE or the NSE as we saw in the Kolkata Stock Exchange in 2001 or in the case of the National Spot Exchange Ltd. (NSEL), which defaulted in a settlement in 2013.