Indian Clearing Corp goes in for Rs.375 crore insurance cover
12 Mar, 2014 01:01 PM
The objective of the policy is to protect ICCL against counter-party defaults, and add a further capital cushion to networth.

Indian Clearing Corp. Ltd (ICCL), the clearing corporation of BSE, Asia’s oldest stock exchange, has taken an insurance cover of Rs.375 crore from United India Insurance Co. Ltd.

“The objective of the policy is to protect ICCL against counter-party defaults, and add a further capital cushion to the ICCL networth making the resources of the non-defaulting members even safer. The policy also adds to the ability of ICCL to absorb higher losses before any resources of the non-defaulting members are put at risk,” said the exchange in a statement.

ICCL is a globally recognized central counter-party (CCP) and has been accorded qualified CCP status by the Securities and Exchange Board of India (Sebi). It elimates the counter-party risk for trading members by taking the responsibility of guaranteeing contractual performance by playing a counter-party for all trades on BSE.

Clearing corporations split the original contracts into two new contracts, between the clearing corporation and each of the counter-parties.
“It is commonplace for clearing houses to add an insurance layer to many other pieces of protection for client funds. The modern clearing house is rather like a state-of-the-art medieval village, with various walls, moats and other protections which must be breached before the castle at the heart of the village can be besieged, let alone attacked,” said Patrick L. Young, executive director at DV Advisors, a capital markets advisory firm.
Any loss arising out of defaults puts the capital of a clearing corporation and its non-defaulting members at risk. Networth of the clearing corporation is important as it determines the potential loss due to a default a clearing corporation can bear without eroding the capital of non-defaulting members.

According to BSE, ICCL has a net worth of over Rs.450 crore, which is nearly 3 times its default fund requirement.

The insurance cover of Rs.375 crore provides an additional capital cushion to mitigate against losses arising out of defaults. BSE, in a statement, also said the amount is more than twice the expected one-day loss for ICCL in all open positions put together as per the various stress scenarios tested by ICCL.

“Clearing houses are striving to be as safe as is feasibly possible so as to engender customer confidence in markets. BSE is acting rationally and with foresight to demonstrate that the exchange is confident it will be in business for the long haul, protecting client assets as part of a sound clearing process”, Young said.
Source : Live Mint

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