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TMI BlogComprehensive Risk Management Framework for National Commodity Derivatives ExchangesX X X X Extracts X X X X X X X X Extracts X X X X ..... anges). The comprehensive risk management framework has been finalised after a due consultative process with the exchanges. The detailed risk management framework is placed at Annexure-I. 3. The provisions of this circular shall be implemented by national commodity derivatives exchanges latest by January 1, 2016 unless specified otherwise in any specific clause of this circular. 4. The norms specified by Forward Markets Commission shall continue to be in force to the extent not modified or repealed by this circular. 5. The exchanges are also advised to: i. ensure that their risk management framework is in line with the provisions contained in the annexure and take steps to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the same. ii. bring the provisions of this circular to the notice of their members and also to disseminate the same on their website. iii. communicate to SEBI, the status of implementation of the provisions of this circular. 6. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, to protect the interests of inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily basis in cash. i. Base Minimum Capital : Exposure free deposit required from all members (Trading members/Clearing members). j. Settlement Guarantee Fund (SGF): Exchanges shall maintain SGF which shall be used by Exchanges only for the purpose of providing settlement guarantee. 2. Liquid Assets: The types of liquid assets acceptable by Exchanges from their members and the applicable haircuts and concentration limits are listed below: Item Minimum Haircut (see Note a ) Limits Cash Equivalents Cash 0 No limit Bank fixed deposits 0 No limit Bank guarantees 0 Limit on exchange s exposure to a single bank (see Note b ) Securities of the Central Government 10% No limit Units of liquid mutual funds or government securities mutual funds (by whatever name called which invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivalent, by a recognized credit rating agency or by a reputed foreign credit rating agency, and not more than 10% of the total liquid assets deposited with the exchanges shall be exposed to all such banks put together. c. Cash equivalents shall be at least 50% of liquid assets. This would imply that Other Liquid Assets in excess of the total Cash Equivalents would not be regarded as part of member s liquid assets as well as total liquid assets. d. For determination of which Equity shares are falling in Group-I and what would be the appropriate VaR margin for these securities, data disseminated by Stock Exchanges having equity platform shall be referred. Stock Exchanges are already required to compute the same on regular basis in accordance with SEBI Circular MRD/DoP/SE/Cir-07/2005 dated February 23, 2005. e. Exchanges shall adequately diversify their collateral so as to avoid any concentration of exposure towards any single entity and the same shall be within the limits as may be prescribed by SEBI from time to time. f. Agricultural commodities to be accepted as collateral should be of same quality specification which is deliverable under the contract specification of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual legs. Exchanges are free to charge margins higher than the minimum specified depending upon their risk perceptions. e. Real Time Computation : The margins should be computed on real time basis. The computation of portfolio initial margin would have two components. The first is the computation of initial margin (EWMA volatility scaled up by 3.5) for each individual contract. At the second stage, these contract initial margins would be applied to the actual portfolio positions to compute the portfolio initial margin. The exchanges are permitted to update EWMA volatility estimates for contracts at discrete time points each day (with a gap of not more than 2 hours between any two consecutive updates and at the end of the trading session) and the latest available scaled up WMA volatility estimates would be applied to member/client portfolios on a real time basis. 4. Extreme Loss Margin (ELM): ELM of 1% on gross open positions shall be levied and shall be deducted from the liquid assets of the clearing member on an online, real time basis. The ELM shall be implemented latest within six months of the date of this circular. Until the time any exchange starts chargin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a factor of square root of two) to cover the potential losses over the time elapsed in the collection of margins. 10. Base Minimum Capital (BMC): i. Exchanges shall have BMC requirements for their members (Trading members/Clearing members) as given below (to be complied within six months from the date of this circular coming into effect): a. Members without Algo trading INR 10 Lacs b. Members doing Algo trading INR 50 Lacs ii. No exposure will be given by the Exchange on this BMC. iii. 25% of the above deposit shall be in the form of cash and balance 75% can be in the form of Fixed Deposit/Bank Guarantee. iv. These funds would be kept in a separate account by the Exchange. v. BMC would be refunded to the members at the time of surrender of membership provided that there is no unsettled claim against member and no arbitration cases are pending against the member. 11. Risk Reduction Mode (RRM) Exchanges shall ensure that the trading members/clearing members are mandatorily put in risk-reduction mode when 90% of the member s Liquid Assets available for adjustment against margins/deposits gets utilized for margins/deposits (to be complied within ..... X X X X Extracts X X X X X X X X Extracts X X X X
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