To further strengthen risk management framework of commodity derivatives market, regulator Sebi today asked exchanges to impose higher margins in case of excessive volatility.
Besides, Sebi said clearing members who clear and settle only non-algo trades for other trading members are required to have minimum base capital of Rs 25 lakh.
Clearing members, who clear and settle algo trades, would continue to have requirement of Rs 50 lakh.
The exchanges are required to make fresh contribution towards settlement guarantee fund (SGF) in case of any shortfall.
This contribution requirement by exchange in any year is currently capped at 5 per cent of the gross revenue (net of income Tax). Now, the cap has been removed and exchanges will have to be required to meet the shortfall in full as indicated in quarterly assessments. Currently, bourses make assessment on SGF on quarterly basis.
Till clearing and settlement of trades in commodity derivatives are transferred to clearing corporations, the default waterfall of exchanges would have to use defaulting member’s money, insurance and exchange resources among others.
“Risk management is primarily the responsibility of exchanges. In cases of excessive market volatility or circumstances where risk element is higher, exchanges are expected to impose higher margins and/or additional margins in the form of special/ad-hoc or other margins as considered appropriate by the exchanges,” Sebi said in a circular.
The moves will help in further strengthening the risk management framework of commodity derivatives markets and avoiding any systemic risk.
Clearing members will have to comply with the minimum base capital requirement by April 1 next year, while other regulations pertaining to imposing higher margins in case of excessive volatility would be implemented by December 1, 2016.
Sebi said that commodity exchanges will have to impose initial margins sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default.
“Exchanges shall therefore estimate the appropriate Margin Period of Risk (MPOR) for each product based on liquidity in the product and scale up the initial margins, if required. However, the MPOR for all commodity derivatives contracts shall be at least two days,” Sebi said.
In case of repeated margin/pay-in shortfalls beyond a threshold amount by any member in a month, the trading member should be put in square off mode and required to reduce positions.
The member be charged initial margins at a higher rate for the next one month. The exchange would have to keep a close watch on such member.
“The member be subjected to a penal exposure free deposit equal to the cumulative funds/margin shortage over previous one month which could be kept with the exchange for the next month,” Securities and Exchange Board of India (Sebi) said.
The regulator said,” delivery period margins would be higher of a three per cent + 5 day 99 per cent value at risk of spot price volatility or 20 per cent. Exchanges may impose higher margins if deemed fit.”
The exchanges would have to impose adequate concentration margins (only on concentrated positions) to cover the risk of longer period required for liquidation of concentrated positions in any commodity.
The threshold value for imposing concentration margin may be determined taking into account factors including open interest, concentration and estimated time to liquidation based on prevailing liquidity and possible reduction in liquidity in times of market stress etc.
“Margin benefit on spread positions shall be entirely withdrawn latest by the start of tender period or expiry-6th day, whichever is earlier,” Sebi said.