Summary of this article
Sebi has amended SGF requirement norms to reduce burden on clearing corporations
The action aims to promote ease of doing business in commodity derivatives trading
The Securities and Exchange Board of India (Sebi) has amended the rules of the settlement guarantee fund (SGF) on the commodity derivatives segment for clearing corporations. The action is aimed towards facilitating ease of business while maintaining safeguards on risk management.
Sebi, in a circular dated March 16, said that the revision in rules was made after receiving representations from market participants and feedback from public consultation. The changes will now require clearing corporations to conduct stress tests, assuming the simultaneous default of at least three clearing members and calculate credit exposure.
Under the earlier framework, clearing corporations were required to calculate credit exposure only out of two clearing members in each stress test scenario. Clearing corporations also had to consider 50 per cent of the credit exposure arising from the simultaneous default of all clearing members. This provision was removed in the new framework.
“For each of the scenarios in Part A, Clearing Corporations shall calculate the credit exposure due to simultaneous default of at least 3 clearing members (and their associates) causing the highest credit exposure,” the circular said.
SGF is a safety buffer maintained by the clearing corporations in order to ensure that trades are settled even if there is a default on the part of a member. These stress tests help in determining whether the fund has enough resources to manage extreme market volatility and situations. The SGF fund serves as a key risk mitigation framework, which provides investors protection against any potential settlement failures in commodity derivatives trades.
Sebi has also included a new provision regarding SGF rules, which allows the market regulator to exempt or provide relaxations from the strict enforcement of such rules on a case-by-case basis. Sebi said that such relaxations may be provided after considering market conditions, strength of the risk management frameworks, and broader investor protection objectives.
“Such exemptions may be considered after taking into account the prevailing market conditions, the adequacy of applicable risk management framework and keeping in view the overall objective of investor protection,” Sebi said.
The changes announced by Sebi could potentially reduce the size of settlement guarantee funds that are required to be maintained by clearing corporations. This could also help clear corporations and members in lowering their capital burden contributed to these guarantee funds. The changes came into effect immediately.
