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TMI BlogAlternate Risk Management Framework Applicable in case of Near Zero and Negative PricesX X X X Extracts X X X X X X X X Extracts X X X X ..... rculars issued in the interregnum, the framework was further strengthened vide circular no. SEBI/HO/CDMRD/ DRMP/CIR/P /2020/15 dated January 27, 2020 . 2. In recent times, extreme volatility has been observed in commodity prices globally, particularly in the case of Crude Oil, wherein the prices had unprecedentedly gone down to zero and subsequently, even negative. In such a scenario, margins equivalent to even 100% of the futures price would not have been sufficient to cover the steep upward or downward price variations in the futures market. 3. In order to enable risk management framework to handle such a scenario of near zero and negative prices, SEBI constituted a Task Force of Clearing Corporations (CCs) and market participant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they shall ensure that their systems are updated for the ARMF. 4. The exchanges are also advised to: 4.1. take steps to make necessary amendments, if any, to the relevant bye-laws, rules and regulations for the implementation of the same. 4.2. bring the provisions of this circular to the notice of their members and also to disseminate the same on their website. 4.3. communicate to SEBI, the status of implementation of the provisions of this circular. 5. 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 investors in securities and to promote the development of, and to regulate the securities market. 6. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derlying commodity/futures contract comes down to the level equal to or lower than the maximum price movement observed over the MPOR (Margin Period of Risk) in past 12 months. 2.5. Any other conditions as per the discretion of the CC, which might indicate the likelihood of negative prices. 3. In case one or more of the above mentioned conditions or any other additional conditions that may be identified by the CC becomes applicable, the CC in consultation with their respective stock Exchange will conduct a review and take a formal decision on whether there is a need to activate the ARMF. The CC shall subsequently also communicate its decision to the market and other stock Exchanges/CCs. If the Lead CC, as defined in SEBI circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vements and past margin amounts observed in respect of such commodities. 7. Spread margin benefit: The correlation between different contracts on the same underlying may not hold in the event of near zero/negative prices. Therefore, margin benefit on spread positions shall be completely withdrawn upon the activation of the ARMF. 8. Option Pricing Model: The theoretical price determination of options shall be done using appropriate models like the Bachelier model, or any other model which can be applied on negative underlying prices. 9. Pre-expiry margins : The appropriate pre-expiry margins shall also be levied by CCs on cash settled contracts, in respect of those commodities in which the ARMF is triggered. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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