In light of the increased market volatility in the recent past, the adequacy of current volatility scan range values used by clearing corporations in their margin framework was examined, Sebi said.
Markets regulator Sebi on Monday reviewed scan range on volatility for option contracts in commodity derivatives segment amid higher market volatility. In light of the increased market volatility in the recent past, the adequacy of current volatility scan range (VSR) values used by clearing corporations in their margin framework was examined, Sebi said in a circular. This was done in the context of CPSS-IOSCO (the Committee on Payment and Settlement Systems and International Organization of Securities Commissions) prescription for margin models, which limits the need for destabilising and pro-cyclical changes.
Now, Sebi, in consultation with clearing corporations, has decided to prescribe minimum VSR values for underlying commodities based on their volatility — high, medium and low, the circular noted. In market parlance, the volatility scan range refers to a range within which the implied volatility might reasonably be expected to move in one day. For low volatility commodities, Sebi has prescribed a minimum VSR of 4 per cent for non-agricultural goods and 5 per cent for agricultural goods.
This is 5 per cent and 6 per cent for non-agricultural goods and agricultural goods, respectively, in the medium category. In the high volatility commodities category, the regulator has prescribed minimum VSR of 6 per cent and 7 per cent for non-agricultural goods and agricultural goods, respectively.
Clearing corporations, providing clearing and settlement for options, will have to review the value of VSR by backtesting on a monthly basis using last three years’ data by 15th of every month and any change in VSR need to be implemented from the 1st trading day of the following month, Sebi said. The backtesting needs to be done by using appropriate models to extract volatility over the relevant margin period of risk period, it added. The new framework would be effective from the first trading day of the month of April 1, 2021, Securities and Exchange Board of India (Sebi) said.