Review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF)

SEBI/HO/MRD/MRD-PoD-2/P/CIR/2024/131 · 2024-10-01 · SEBI Market Regulation Department

Summary

SEBI mandates new stress testing methodologies, including Stressed VaR and Filtered Historic Simulation, to determine the Minimum Required Corpus for the Core Settlement Guarantee Fund in equity derivatives. The circular permits a one-time inter-segment transfer of funds from the equity cash segment to equity derivatives under specific conditions regarding average stress losses. Clearing Corporations are required to collect additional contributions by February 1, 2025, based on historical stress data since January 2024. Paragraphs 8.2 and 8.3 clarify that staggered contributions do not alter the monthly MRC calculation basis and mandate Clearing Corporations to disclose contribution discrepancies on their websites. Paragraphs 9.1 through 9.5 establish uniform stress testing methodologies and categorize Clearing Corporations into Category A or B based on market share, dictating specific credit exposure calculations for each. Paragraphs 10 through 12 outline the coexistence of old and new stress testing models, direct Clearing Corporations and stock exchanges to formulate SOPs and implement systems, and cite the statutory powers under which the circular is issued.

Text

SEBI has decided to introduce additional hypothetical stress testing scenarios/methodologies for determining the Minimum Required Corpus (MRC) of Core SGF in the equity derivatives segment.

Uses variance-covariance matrix from a stress period; volatility observed during stress period is multiplied by a factor of 2; Montecarlo simulations assume multivariate normality; option volatility shocked by 100%.

Adjusts past data to capture prevailing volatility; historical returns divided by contemporaneous estimated volatility and multiplied by latest estimate; volatility calculated as EWMA with λ = 0.94.

Highest 3-day close-to-close movement of NIFTY considered based on historical data since 2000; multiplied by beta of stock from a stress period; option volatility shocked by 100%.

Data for modeling returns/movements shall be based on stress period(s) specified by the CCs.

CCs shall jointly frame a policy on updation and review of stress periods and get it approved by their respective Risk Committees.

A Stress Period of Risk (SPOR) of 3 days would be considered for the above models.

A one-time inter-segment transfer of funds would be allowed to CC subject to the framework outlined to cater to increase in initial MRC requirement.

If average stress loss applicable for the month < 50% of the applicable MRC of the month in equity cash segment for last 12 months, CCs can transfer up to 100% of the additional amount available over and above MRC.

CC's shall maintain minimum 50% of MRC, exchanges shall maintain 25%, and 25%-member contribution may be attributed to Parent Exchange in remaining Core SGF of ECM.

All CCs shall be permitted a one-time transfer of penalties and the interest accrued thereon in ECM to EDX segment under Penalty head.

Any inter-segment transfer of core SGF funds should be carried out after a CC has taken approval from its Risk Committee.

Source: SecMarx — Review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.