Settlement Guarantee Fund and Investor Protection Fund

The Settlement Guarantee Fund is a pool of money maintained by the clearing corporation (currently NSE Clearing Corporation Ltd. and BSE Clearing Corporation Ltd.) to ensure that settlement obligations in the equity derivatives segment are honoured even if a participant defaults.

Its primary objective is to provide a guarantee against settlement risk, thereby preserving market confidence and preventing a cascade of failures. The fund steps in when the defaulting member’s own margin and collateral are insufficient to meet its settlement liabilities.

For the NISM exam, remember that SGF is linked directly to the clearing process and is funded by the members based on their net turnover. Questions may ask you to identify the source of SGF contributions or the trigger events for fund utilisation.

• SGF is a pre‑emptive safety net for settlement failures.
• Only clearing members (brokers, sub‑brokers) contribute to SGF.

The Investor Protection Fund is created to compensate investors who suffer losses due to the default of a broker or a clearing member. It is administered by the Securities and Exchange Board of India (SEBI) through the Investor Protection and Education Fund (IPEF) mechanism.

IPF is funded by a statutory levy on the gross turnover of brokers and by periodic contributions from the securities market participants. The fund is used only after the defaulting broker’s assets have been exhausted and the investor’s claim is verified.

In the NISM exam, you may be asked about the eligibility criteria for investors to claim from IPF, the typical levy rate, or the hierarchy of claim settlement (broker’s assets → SGF → IPF).

• IPF is a post‑default compensation mechanism for investors.
• All registered brokers contribute, irrespective of their clearing status.

Both SGF and IPF rely on contributions from market participants, but the calculation methods differ. SGF contributions are typically a small percentage of a clearing member’s net turnover for the reporting period. IPF contributions are a fixed percentage of the broker’s gross turnover, as prescribed by SEBI circulars.

The rationale behind using turnover as the base is to align the fund size with the market activity and risk exposure. Higher turnover implies higher potential settlement risk, so the contribution scales accordingly.

For exam preparation, remember the formula used to compute the SGF contribution and the statutory rate for IPF (currently 0.001% of gross turnover, subject to periodic revision). Knowing the variables helps you answer calculation‑type questions.

When a clearing member cannot meet its settlement obligations, the clearing corporation first exhausts the defaulting member’s own margin and collateral. If a shortfall remains, the SGF is tapped to bridge the gap, ensuring that the counterparties receive their due amounts.

IPF is invoked only after a broker’s assets are liquidated and the investor’s claim is validated. The fund pays the eligible amount up to the statutory ceiling, after which any residual loss is borne by the investor.

Exam questions may present a scenario of a broker default and ask you to identify the sequence of fund utilisation – first the broker’s assets, then SGF (if the broker is also a clearing member), and finally IPF for the investor’s compensation.

SEBI, as the market regulator, issues the circulars that prescribe the contribution rates, eligibility criteria, and claim procedures for both SGF and IPF. The clearing corporations implement the operational aspects, such as daily monitoring of member positions and fund allocation.

Periodic audits are conducted by SEBI to ensure that the funds are adequately capitalised and that the utilisation processes are transparent. Non‑compliance can attract penalties, which are also part of the exam syllabus.

Remember that any change in the statutory rates will be communicated through SEBI circulars, and candidates should stay updated with the latest notifications before the exam.