Minimum Required Corpus

A clearing corporation keeps a Core Settlement Guarantee Fund (Core SGF) for each segment so that one member's failure does not stop settlement for everyone. The obvious question is how big that fund must be. The Minimum Required Corpus (MRC) is the answer.

The MRC is not a round number picked once. It is recalculated every month from stress tests: each day the clearing corporation asks "if members defaulted under extreme but plausible conditions, how much loss would be left uncovered?" The worst such number for each day feeds the next month's MRC.

Once the MRC is set, the clearing corporation, the stock exchange and the clearing members each have to put in their share.

The workbook (section 4.3.1) lays down the conditions:

1. The MRC is fixed for a month.
2. By the 15th of every month, the clearing corporation reviews and determines the MRC for the next month, based on the daily stress tests of the preceding month. By the same date it reviews the adequacy of contributions.
3. For every day of the preceding month, uncovered loss numbers are estimated by the credit-risk stress tests, and the highest is that day's worst-case loss number.
4. The average of all the daily worst-case loss numbers is calculated.
5. The MRC for next month is the higher of that average and the segment MRC as per the previous review.

Contributions (section 4.3.2):

Penalties levied by the clearing corporation, and interest on cash contributions, are credited to the Core SGF. If the fund is used, contributors must immediately replenish it to MRC, but members' replenishment is limited to once in 30 calendar days regardless of the number of defaults.

Daily worst-case loss (day d) = highest uncovered loss across that day's credit-risk stress tests

Average = sum of daily worst-case losses / number of days in the month

MRC (next month) = higher of [Average, MRC as per previous review]

Figures are illustrative; the method and percentages are the workbook's.

A segment's MRC as per the last review is Rs 650 crore. The daily worst-case loss numbers from October's stress tests average Rs 620 crore. By 15 November the clearing corporation sets the MRC for December:

higher of (Rs 620 crore, Rs 650 crore) = Rs 650 crore.

At the next review, November's daily numbers average Rs 700 crore. Now MRC = higher of (Rs 700 crore, Rs 650 crore) = Rs 700 crore, and the contributions due at that MRC are:

Each member's slice of the Rs 175 crore is assessed pro rata to the risk it brings to the system.

Chapter 4 (Risk Management, section 4.3, Core Settlement Guarantee Fund) is the only place the MRC appears, but it is a dense source of numbers: the monthly review by the 15th, the "higher of" rule, the 50/25/25 contribution split, the once-in-30-days limit on member replenishment, and its later use in the default waterfall (5% of segment MRC as clearing corporation resources, and at least 25% of MRC as CC contribution). Learn the split as "at least, at least, not more than".

• Members contribute "not more than 25%", while the CC and exchange contribute "at least" 50% and 25%. The direction of the limit is the trap.
• No exposure is available to clearing members on their Core SGF contribution.
• The MRC uses the average of daily worst-case numbers, not the single worst day of the month. Each day's highest stress-test number is taken, then those are averaged.
• "Higher of" the average and the previous MRC - the new average alone does not set the MRC.
• Reviewed by the 15th of every month, fixed for a month. Not quarterly.
• Members replenish only once in any 30 calendar days, counted from the clearing corporation's notice of default. If a contributor fails to replenish, the shortfall is met temporarily first by the CC, then by the SE.