Robust risk management norms in place to deal with volatility: Sebi

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Published: March 14, 2020 4:30:15 AM

Market participants say that whenever there is a fear in the market and speculators short-sell then markets come under further pressure.

Short-selling is a trading strategy that speculates on the decline of the price of the stock or any other security. Short-selling is a trading strategy that speculates on the decline of the price of the stock or any other security.

Markets regulator Sebi on Friday said stock exchanges and market regulator have a robust risk management framework in place and are prepared to take suitable action to deal with the market volatility. However, market participants said that the Securities and Exchange Board of India (Sebi) could have banned short-selling like China did to protect the markets from a sharp fall. China banned short-selling in the first week of February.

G Chokkalingam, founder and managing director at Equinomics Research, said, “China had banned short-selling in February and have avoided major chaos. Today Chinese markets are the best performing market in the world.” He also added that if this fear continuous and there is further spread of novel coronavirus, Sebi should ban short-selling. Since February, Sensex and Nifty have fallen by 19.51% and 19.83%, respectively. While Shanghai Composite is down by just 1.78% since February. Other equity markets in Russia, Brazil and France have seen falls of over 30% since February this year.

Short-selling is a trading strategy that speculates on the decline of the price of the stock or any other security. Market participants say that whenever there is a fear in the market and speculators short-sell then markets come under further pressure. “In India and globally regulators didn’t take the recent fall in equity markets seriously and as a result short-sellers actually killed the market. I think Sebi could have handled the issue in a better way,” said one broker.

Sebi on Friday in its release said that over the last few days the Indian stock market has been moving in tandem with other global markets owing to concerns relating to novel coronavirus pandemic, resultant fear of economic slowdown, recent fall in global crude prices among other.

Regulators have made it clear they would intervene as and when needed to maintain stability in the financial markets. “Sebi and stock exchanges have a robust risk management framework in place which automatically gets triggered in response to movements in the indices (BSE Sensex and NSE Nifty) as well as individual stocks both in cash and derivatives market,” said Sebi in its release. The measures include, Value at Risk (VaR) margin with initial margin to cover 99% risk of a transaction, Extreme Loss Margin (ELM) to cover the residual risk of a transaction and collection of mark to market losses on daily basis among others.

The market regulator also stated that the positions of margin payments, margin utilisation, adequacy of collaterals (securities deposited by the brokers with the clearing corporations) and the pay-in’s obligations being met by the clearing members (brokers) are being continuously monitored. Similarly, the settlement and clearance of trades are also being constantly monitored.

However, some market participants believe that there is no need to ban short-selling in India and Sebi have acted in a mature way. Vijay Bhushan, president at Association of National Exchanges Member of India (ANMI), said, “I would say that when there is sell-off globally, India is no longer isolated from what is happening in other parts of the world. In such a scenario, given the safeguards that have already built in the system, there was no need for Sebi to take any other step. I am not advocate of changing the way we trade like banning short selling only because Indian markets have fallen by over 20% from its high.”

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