Settlement Guarantee Fund
Also written SGF · Core Settlement Guarantee Fund · Core SGF
A fund held by the clearing corporation, built from contributions by the exchange, the clearing corporation and clearing members plus a share of settlement penalties, used to complete settlement if a member defaults.
In plain language
A clearing corporation promises that trades on its exchange will settle, whoever defaults. Margins are the first line of that promise. The Settlement Guarantee Fund is what stands behind the margins.
The workbook describes it as a buffer for residual risk that operates like an insurance mechanism. If a trading member fails to meet a settlement obligation, the fund is used to the extent required, in the order laid down by the default waterfall, so settlement is completed anyway.
Its real product is confidence: participants trade knowing settlement will be completed "irrespective of a default by the counterparties to a trade".
How it works
Sources.
- Contributions by the exchange, the clearing corporation and the clearing members.
- A portion of all settlement-related penalties collected from participants.
Delivery default penalties feed it. When a seller defaults on delivery (Chapter 7, section 7.6):
| Component | Agri contracts | Non-agri contracts |
|---|---|---|
| Penalty | 4% of settlement price + replacement cost | 3% of settlement price + replacement cost |
| To the SGF | at least 1.75% | at least 1.75% |
| To the clearing corporation (admin) | up to 0.25% | up to 0.25% |
| To the buyer | 2% + replacement cost | 1% + replacement cost |
Regulatory figures.
| Circular | Rule |
|---|---|
| SEBI, 11 July 2018 | Minimum Required Corpus of the Core SGF for any exchange's commodity derivatives segment: Rs 10 crore minimum threshold |
| SEBI, 23 May 2023 | Excess contributions may be returned to contributors pro rata, with SEBI's prior approval |
| SEBI, 11 March 2026 | SEBI may grant exemptions or relaxations from SGF provisions in the commodity derivatives segment case by case, considering market conditions, the risk management framework and investor protection |
Not the IPF. The Investor Protection Fund is separate: it funds investor education and awareness and can pay client claims where a defaulting member's dues exceed his margins. It receives non-settlement penalties and 1 per cent of turnover fees (minimum Rs 10 lakh a year). Settlement penalties go to the SGF.
A worked example
A seller in a non-agricultural futures contract fails to deliver. The settlement value of the undelivered quantity is Rs 20,00,000. Spot prices after the pay-out date are higher than the settlement price, so there is also a replacement cost (not quantified here).
Penalty (3%) = 3% x 20,00,000 = Rs 60,000 + replacement cost
| Destination | Share | Amount |
|---|---|---|
| Settlement Guarantee Fund | at least 1.75% | Rs 35,000 (minimum) |
| Clearing corporation, admin | up to 0.25% | Rs 5,000 (maximum) |
| Buyer entitled to delivery | balance 1% + replacement cost | Rs 20,000 + replacement cost |
The fund at work. Suppose instead a clearing member collapses owing Rs 14 crore in settlement obligations, and the margins and deposits it had posted cover only part of it. Under the default waterfall the SGF is drawn on for the shortfall, so every counterparty on the other side of that member's trades is paid on schedule.
Rebuilding it. Rs 35,000 from one default is small. It is the steady flow of such penalties, on top of contributions — against a Core SGF floor of at least Rs 10 crore — that keeps the fund large enough for the day it is needed.
Why NISM asks about it
Chapter 7, section 7.4.1, lists maintaining and managing SGFs among the clearing corporation's functions; section 7.6 gives the penalty split; section 7.8.6 names SGFs among the defences against systemic risk; and section 7.10.7 (Settlement Guarantee Fund) sets out its purpose, sources and the three SEBI circulars. Expect questions on who contributes, where penalty money goes, the Rs 10 crore Core SGF minimum, and the difference between the SGF and the IPF.
Common exam traps
- SGF, not IPF, receives settlement penalties. The IPF receives penalties other than settlement violations.
- At least 1.75% of the settlement price of a delivery default goes to the SGF — whether agri or non-agri. The buyer's share is what differs (2% versus 1%).
- Contributors are the exchange, the clearing corporation and clearing members — not clients directly.
- Rs 10 crore is the minimum threshold for the Core SGF's Minimum Required Corpus in the commodity derivatives segment (SEBI, 11 July 2018).
- Excess can be returned pro rata — only with SEBI's prior approval.
- It is used through the default waterfall, to the extent required and accessible, not as a first resort ahead of the defaulter's own margins.
- The March 2026 circular allows case-by-case relaxations from SGF provisions. A question implying SGF rules can never be relaxed is out of date.
Check yourself
1.How does the funding of the Settlement Guarantee Fund differ from that of the Investor Protection Fund?
- a)Both are funded entirely by exchange contributions
- b)The SGF receives settlement-related penalties, while the IPF receives all other penalties plus 1% of turnover fee or Rs 10 lakh a year, whichever is higher
- c)The SGF is funded by SEBI and the IPF by the clearing corporation alone
- d)The IPF receives settlement penalties and the SGF receives investor education levies
Show the answer
Answer: (b) The SGF receives settlement-related penalties, while the IPF receives all other penalties plus 1% of turnover fee or Rs 10 lakh a year, whichever is higher
SGF: "a corpus made up of CONTRIBUTIONS BY THE EXCHANGE, CLEARING CORPORATION, AND THE CLEARING MEMBERS. Besides, A PORTION OF ALL THE PENALTIES RELATED TO SETTLEMENTS collected from participants WILL ALSO BE CREDITED to the Settlement Guarantee Fund."
IPF: "The source funds include ALL PENALTIES COLLECTED FROM THE VIOLATING PARTICIPANTS (OTHER THAN SETTLEMENT VIOLATIONS) AND 1% OF THE TURNOVER FEE that is collected by the exchange from its members, OR A MINIMUM OF Rs 10 LAKHS (WHICHEVER IS HIGHER) IN A FINANCIAL YEAR."
The division is clean and worth memorising as a pair: settlement penalties feed the SGF; every other penalty feeds the IPF. The money follows the harm — a settlement failure threatens the settlement system, so its penalty reinforces the settlement buffer.
What each does:
SGF IPF Purpose "A BUFFER FOR ANY RESIDUAL RISK, operating LIKE AN INSURANCE MECHANISM", drawn on through a DEFAULT WATERFALL when a member fails to settle "INITIATIVES OF INVESTOR EDUCATION AND AWARENESS", and to "PAY THE CLAIM OF CLIENTS OR INVESTORS IN THE CASE OF DEFAULT BY A MEMBER where dues exceed margins deposited" Administration Held with the clearing corporation ⚠️ Administered by a TRUST meeting SEBI norms Minimum ⚠️ Rs 10 CRORE minimum required corpus (MRC) for the commodity derivatives segment ⚠️ Rs 10 LAKH minimum annual funding Note the recent flexibility on the SGF: excess contributions "may be returned to the contributing stakeholders on a PRO-RATA BASIS, SUBJECT TO PRIOR APPROVAL OF SEBI", and SEBI "may grant EXEMPTIONS OR RELAXATIONS... ON A CASE TO CASE BASIS."
2.Of the 4 per cent penalty levied on a seller who defaults on delivery of an agri commodity, how much goes to the buyer entitled to receive delivery?
- a)The whole 4 per cent plus replacement cost
- b)2 per cent of settlement price plus the replacement cost
- c)1.75 per cent of settlement price only
- d)0.25 per cent of settlement price plus replacement cost
Show the answer
Answer: (b) 2 per cent of settlement price plus the replacement cost
The apportionment rule:
Recipient ⚠️ Share Settlement Guarantee Fund ⚠️ AT LEAST 1.75% of settlement price Clearing Corporation (administration) ⚠️ UP TO 0.25% of settlement price ⚠️ The buyer entitled to delivery ⚠️ The balance — 2% for agri, 1% for non-agri — PLUS THE REPLACEMENT COST "BALANCE AMOUNT (i.e. 1% OF SETTLEMENT PRICE IN CASE OF NON-AGRI GOODS OR 2% OF SETTLEMENT PRICE IN CASE OF AGRI GOODS) PLUS REPLACEMENT COST SHALL GO TO THE BUYER WHO WAS ENTITLED TO RECEIVE DELIVERY."
Check the arithmetic both ways: agri 4% = 1.75 + 0.25 + 2 and non-agri 3% = 1.75 + 0.25 + 1. The SGF and administration slices are identical in both cases — so the entire agri/non-agri difference flows to the buyer.
And note that the whole replacement cost goes to the buyer too, which is right: he is the one who must now go into the market and buy the goods at whatever price prevails.
The replacement cost is measured differently for the two:
- ⚠️ AGRI: the difference between settlement price and THE AVERAGE OF THREE HIGHEST OF THE LAST SPOT PRICES OF 5 SUCCEEDING DAYS after the commodity pay-out date
- ⚠️ NON-AGRI: the difference between settlement price and THE HIGHER OF THE LAST SPOT PRICES ON THE PAY-OUT DATE AND THE FOLLOWING DAY
In both cases, "IF the price so determined IS HIGHER THAN SETTLEMENT PRICE, ELSE THIS COMPONENT WILL BE ZERO."
Clearing corporations may also "increase/decrease penalty for specific commodities... IN CONSULTATION WITH SEBI", and may add "PENAL/DISCIPLINARY ACTION against INTENTIONAL/WILLFUL DELIVERY DEFAULT."
3.Some exchanges limit how much of their exposure can be backed by bank guarantees from any single bank. The workbook describes this as a proactive step against which risk?
- a)Systemic risk
- b)Legal risk
- c)Operational risk
- d)Replacement-cost risk
Show the answer
Answer: (a) Systemic risk
The workbook's words, under Systemic Risk: "Systemic risk might arise when THE DEFAULT BY ONE OF THE PARTIES LEADS TO THE DEFAULT OF OTHER PARTIES TOO... SOME OF THE EXCHANGES ALSO HAVE LIMITS TO EXPOSURE TO BANK GUARANTEES OF A SINGLE BANK which is an example of exchanges proactive attempts to PREEMPT SYSTEMIC RISKS that may arise due to the bank's financial woes." So option (a) is right.
The reasoning: if many members' margins were backed by guarantees from one bank, that bank's failure would leave many members short of margin at the same moment. One failure would spread across the system.
Why the others are wrong:
- (b) Legal risk comes from "uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations". The workbook's examples are the Essential Commodities Act and FSSAI standards, plus GST and CTT.
- (c) Operational risk is "loss resulting from inadequate or failed internal processes, people and systems, or from external events". The workbook's examples are connectivity problems, trading-engine hang-ups and sun outage.
- (d) Replacement-cost risk is the cost of replacing a defaulted trade at a worse price.
Other systemic-risk defences named in the workbook: "stricter rules and regulations on margining, capital adequacy standards, settlement guarantee funds and legal backing for settlement activity."
Where this is taught
Free preparation for NISM Series XVIRelated terms
- NovationThe clearing corporation stepping into the middle of every trade — becoming the buyer to every seller and the seller to every buyer — so that neither side carries the other's default risk.
- Default waterfallThe fixed order in which a clearing corporation uses its resources to cover a member default: defaulter's money first, then insurance, its own capital, the Core SGF, and last a haircut to pay-outs.
- Investor Protection FundA trust-administered fund at every stock exchange and depository that compensates clients of a trading member who has been declared a defaulter or expelled, up to a per-investor limit the exchange fixes.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Systemic riskThe risk that one participant's default triggers defaults by others until the settlement system itself fails — the domino risk, not the market risk.
- Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Transactional riskThe risk that the other party in a share trade fails to pay for shares bought or fails to deliver shares sold, mitigated by trading through the exchange's guaranteed settlement system.
- Replacement costThe part of a seller's delivery-default penalty measured against the market — the gap between the settlement price and the actual spot price the non-defaulting buyer would need to pay to replace the missed delivery.
- Replacement-cost riskThe pre-settlement half of counterparty risk — the cost of having to replace a defaulted trade, usually at a worse price than the original, before settlement was ever due.
- Principal riskThe risk of having paid or delivered without receiving the other side — the settlement half of counterparty risk, eliminated by a central counterparty acting through novation.
- Minimum Required CorpusThe minimum size of a segment's Core Settlement Guarantee Fund, reset every month from the previous month's daily stress-test losses and shared among the clearing corporation, exchange and members.
- Buy-in auctionThe auction a clearing corporation runs through the exchange system on settlement day to buy shares a selling member failed to deliver, so the buying member still receives them.
- Close outSettling an undelivered sale in cash instead of shares: the defaulting seller is charged at a penal close-out price, used when an auction finds no sellers or is not held at all.
- Dabba tradingIllegal off-exchange "trading" by unregistered operators who record deals against exchange prices in private books and settle only price differences in cash, with no delivery, guarantee or investor protection.
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.