Trade Guarantee Fund

An exchange promises that trades executed on it will be honoured. Behind that promise sits a pool of money contributed by the exchange's own members.

That pool is the Trade Guarantee Fund (TGF). Every active member of the exchange must make an initial contribution to it.

Chapter 8, section 8.4, gives the fund's three stated objectives:

• To guarantee settlement of bona fide transactions of the exchange's members.
• To inculcate confidence in the minds of market participants.
• To protect the interest of investors in securities.

All active members of the exchange are required to make an initial contribution towards the Trade Guarantee Fund.

An exchange onboards a new clearing member, XYZ Clearing Ltd. Chapter 8's eligibility list, right next to the rule creating the Trade Guarantee Fund, also requires XYZ to show a net worth of at least Rs 3 crore and to maintain Rs 50 lakh as liquid net worth before it can become an active member at all. Once admitted as an active member, XYZ must additionally make its initial contribution to the exchange's Trade Guarantee Fund, alongside these membership deposits — though the workbook does not state how large that TGF contribution itself must be.

Later, if a different member fails to honour a bona fide trade it executed, the Trade Guarantee Fund is one of the pools the exchange can draw on to see that the trade settles anyway — which is precisely the confidence the fund exists to provide to every other participant trading on that exchange.

Chapter 8, section 8.4, lists the Trade Guarantee Fund's three objectives directly, and a workbook sample question asks which of the three is "the" main objective — the answer being all of them together. Expect a question testing recall of these three stated purposes.

• All three objectives — guaranteeing settlement, building confidence, and protecting investors — are correct together; a sample question in the workbook itself is phrased so that "all of the above" is the right answer.
• Every active member contributes, not just larger or clearing members.
• The workbook does not give a contribution formula or amount for the TGF — do not invent one.