New Sebi rules for commexes

Tightens margins, collateral requirements for commodity derivatives, beside other alignments, as the new regulator

The Securities and Exchange Board of India (Sebi) has tightened margin and collateral requirements for commodities trading, to align these with practices in the securities market.

Now the regulator for commodities' derivatives, too, a circular it issued on Thursday prescribes limits for various assets put as collateral with an exchange. The new norms shall be implemented from January 1.

The limit for cash or its equivalents has been fixed at 50 per cent and for commodity-specific limits, too. The limit for agri commodities to be accepted as liquid asset collateral is 40 per cent.

The minimum value of the initial margin has been made commodity-specific. The level for nickel is five per cent; for other commodities, four per cent. An extreme loss margin of one per cent of gross positions should be implemented in six months. Till then, the initial margins shall be increased by one percentage point. These margins shall be collected at the time of trade. For collecting other margins, T+2 or a maximum of two days have been given.

Exchanges may levy additional margins, based on their evaluation in specific situations.

All unexecuted orders shall be cancelled once the trading member or his clearing member breaches the 90 per cent collateral utilisation level. This has been an effective tool in the securities market.

Sebi also said, “All open positions of a futures contract would be settled daily, only in cash, based on the daily settlement price (DSP). DSP shall be reckoned and disseminated by the exchange at the end of every trading day. The mark to market gains and losses (revaluation at current prices) shall be settled in cash before the start of trading on T+1 day.”

Adding: “If mark to market obligations are not collected before start of the next day’s trading, the exchange shall collect a correspondingly higher initial margin (scaling up by a factor of square root of two) to cover the potential losses over the time elapsed in the collection of margins.”

Sebi, however, kept the minimum base capital (BMC) unchanged at Rs 10 lakh without algorithmic trading and Rs 50 lakh for algo trading members. No exposure will be given by an exchange on the BMC; it will be refunded at the time of surrendering a membership. Exchanges have been directed to keep this BMC in a separate account.

A clearing member's liquid assets after adjusting for applicable margins will be referred to as his Liquid Net Worth and these will have to be maintained as specified by the regulator.

Exchanges will lay down exposure limits in either rupee terms or as a percentage of the total liquid assets that can be exposed to a single bank, directly or indirectly. The total exposure towards any bank would include guarantees issued by the latter, as well as debt or equity securities deposited by members towards the total liquid asset.

“Not more than one per cent of the total liquid assets deposited with the exchange shall be exposed to any single bank which has a net worth of less than Rs 500 crore and is not rated P1 (or P1+) or equivalent by a recognised credit rating agency. And, not more than 10 per cent of the total liquid assets deposited with the exchanges shall be exposed to all such banks put together,” Sebi has said.