Definition
Settlement Guarantee Fund (SGF)
The settlement guarantee fund is a pool of capital maintained by the clearing corporation to ensure settlement is completed even if a member defaults, protecting the integrity of the market.
India's clearing corporations maintain an SGF, contributed to by the clearing corporation, the exchange and clearing members, that can be drawn upon if a member fails to meet its obligations. It is a core layer of the default waterfall that lets the CCP guarantee settlement.
If a member defaults, the clearing corporation first uses the defaulter's margins and contributions, then the SGF and its own capital in a defined sequence. The SGF's adequacy is stress-tested and regulated by SEBI, since it underwrites the promise that every trade will settle regardless of an individual member's failure.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Central Counterparty (CCP)A central counterparty is an institution that interposes itself between the two sides of a trade, becoming buyer to the seller and seller to the buyer, thereby guaranteeing performance and concentrating risk management.
- NovationNovation is the legal process by which the clearing corporation replaces a single trade between two members with two new trades, becoming the counterparty to each side and assuming the settlement obligation.
- NettingNetting is the offsetting of a member's buy and sell obligations in the same security and settlement so that only the net quantity of shares and net amount of money change hands.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.