The group deliberated on the question of the acceptability of bank guarantees in the futures market where (unlike in the cash market) banks and institutions are themselves subject to margins. The question also arose as to whether a bank could offer its own bank guarantee to meet the margin requirements on its own position. This problem would arise if a bank itself became a member of the futures exchange or if it gave a bank guarantee for a broker through whom it has originated a large open position on its own account.

The group concluded that given the Indian realities, it is necessary to accept bank guarantees as part of the liquid net worth of the broker. It is also of the view that a requirement that a bank cannot give its own bank guarantee on its own behalf would be neither conceptually sound nor easy to enforce (For example, two banks could give guarantees to each other).

The group is also of the view that all banks cannot be treated alike by the clearing corporation without regard to their net worth, capital adequacy, credit rating and other characteristics. Considering all the above, the group decided that the clearing corporation would set an exposure limit for each bank taking into account all relevant factors. Specifically, the group recommends:

1. The Board of Directors or other equivalent organ of the clearing corporation shall lay down exposure limits either in rupee terms or as percentage of the trade guarantee fund that can be exposed to a single bank directly or indirectly. The total exposure would include guarantees provided by the bank for itself or for others as well as debt or equity securities of the bank which have been deposited by members as liquid assets for margins or net worth requirement.
2. Not more than 5% of the trade guarantee fund or 1% of the total liquid assets deposited with the clearing house whichever is lower shall be exposed to any single bank which is not rated P1 (or P1+) or equivalent by a RBI recognised credit rating agency and not more than 50% of the trade guarantee fund or 10% of the total liquid assets deposited with the clearing house whichever is lower shall be exposed to all such banks put together.
3. The exposure limits and any changes thereto shall be promptly communicated to SEBI. The clearing corporation shall also periodically disclose to SEBI its actual exposure to various banks.