Sebi lays down risk management norms for commodity bourses

Markets regulator Sebi today issued a comprehensive risk management framework for national commodity derivatives exchanges, including minimum liquid net worth requirement and settlement guarantee fund.
The detailed risk management framework has been finalised after a due consultative process with the exchanges.
The circular will be implemented by January 1, 2016, the Securities and Exchange Board of India (Sebi) said.
All recognised associations under the Forward Contracts (Regulation) Act, 1952 are deemed to be stock exchanges under the Securities Contracts (Regulation) Act, 1956, with effect from September 28, 2015, the day when merger of commodity markets regulator FMC with Sebi became effective.

Issuing detailed guidelines today, Sebi said liquid assets will be deposited by members with the exchanges in compliance with the norms specified herewith to cover various margin and deposit requirements.
Mark to market settlement on all open positions of clients/members will be done on a daily basis in cash.

The regulator has asked the exchanges to maintain Settlement Guarantee Fund (SGF) which will be used by them only for the purpose of providing settlement guarantee.
Initial and additional margins or any other margins as may be specified by Sebi from time to time will be deducted from the liquid assets of a clearing member.

The clearing member's liquid assets after adjusting for applicable margins will be referred to as 'Liquid Networth' of the clearing member. These members will have to maintain 'Liquid Networth' as specified by the regulator.
According to Sebi, the exchanges will lay down exposure limits either in rupee terms or as 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 bank guarantees issued by the bank as well as debt or equity securities of the bank which have been deposited by members towards 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 noted.
Cash equivalents will be at least 50 per cent of liquid assets.
Exchanges will have to adequately diversify their collateral so as to avoid any concentration of exposure towards any single entity and the same shall be within limits as may be prescribed by Sebi from time to time.

These exchanges will have to make necessary arrangements to enable timely liquidation of collaterals accepted by them.