Review of Margin Framework for Commodity Derivatives Segment

SEBI/HO/CDMRD/DRMP/CIR/P/2020/15 · 2020-01-27 · SEBI Division of Risk Management, Commodity Derivatives Market Regulation Department

Summary

SEBI revises the margin framework for commodity derivatives by categorizing commodities into Low, Medium, and High volatility groups. Clearing Corporations must apply specific minimum Initial Margin and Margin Period of Risk values based on these categories and agricultural status. The circular mandates a six-monthly review process, lean period margins for agri-commodities, and phased implementation within three months.

Text

Clearing Corporations (CCs) shall categorise their commodities into three categories of volatility based upon the realized volatility for last three years: Low (0 to 15%), Medium (Above 15 % to 20%), and High (Above 20%).

Realized volatility shall be calculated from series of daily log normal return of main near month future contracts of the respective commodity, with rollover rules applied during staggered delivery or expiry.

Exchange having maximum average daily turnover across all derivative contracts on the respective commodity based on last six months’ period shall be termed as Lead Exchange. The CC of the Lead Exchange shall do the categorisation of the respective commodities and same shall be intimated to, and adopted by all other CCs.

Based on volatility category, minimum initial margin (IM) and minimum MPOR shall be as under: Low (Non-Agri IM 6%, Agri IM 8%, Non-Agri MPOR 2, Agri MPOR 3); Medium (Non-Agri IM 8%, Agri IM 10%, Non-Agri MPOR 2, Agri MPOR 3); High (Non-Agri IM 10%, Agri IM 12%, Non-Agri MPOR 3, Agri MPOR 4).

It is also clarified that floor values prescribed for IM in table above need not be scaled up by MPOR.

CCs shall review the categories of all commodities once in every six months’ period based upon past three years’ data. Commodity may be moved from a higher volatility category to lower category only if it satisfies criteria of the revised category of volatility for two consecutive reviews. However, movement from a lower to higher volatility category shall be done based upon a single review.

The categorisation shall be done on 1st March and 1st September of each year on rolling basis and changes if any shall be made applicable from 1st April and 1st October respectively of each year.

In case derivatives are launched on any new underlying commodity for the first time for which no reference futures prices are available, it shall be initially categorised based upon prices available in the spot markets subject to a minimum of Medium Category of volatility. Re-categorisation of such commodity from higher to lower category of volatility can only be done after two consecutive reviews.

In case of Agri commodities, CCs shall levy additional lean period margin of 2% on contracts expiring during lean period.

Lead exchanges shall determine the lean period in consultation with their relevant Product Advisory Committee and disclose the same on their websites.

It is reiterated that risk management is primarily a responsibility of CCs and the framework prescribed by SEBI is minimum framework. CCs are allowed to be more conservative as per their own perception of risk.

CCs shall also disclose detailed break up of various applicable margins on contracts cleared by them along with volatility on their websites.

Source: SecMarx — Review of Margin Framework for Commodity Derivatives Segment. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.