Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices
Summary
SEBI mandates an Alternate Risk Management Framework (ARMF) for Clearing Corporations to handle near-zero and negative commodity prices. The framework outlines specific triggers for activation, such as significant price drops or international benchmark changes, and defines technical adjustments like normal distribution assumptions. Clearing Corporations are required to update their systems within 60 days and communicate implementation status to the regulator.
Text
Alternate Risk Management Framework (ARMF) shall be applicable in such cases of near zero and negative prices for any underlying commodities/futures.
Commodities having specialized storage space needs causing environmental hazards AND those that can’t be disposed of/destroyed with ease may be treated as susceptible.
The CCs shall ensure the readiness of their systems to implement the prescribed ARMF within 60 days of the date of this circular.
CCs who do not presently provide clearing services for susceptible commodities are not required to update systems, subject to certification by their Risk Management Committee.
Take steps to make necessary amendments, if any, to the relevant bye-laws, rules and regulations for the implementation of the same.
Bring the provisions of this circular to the notice of their members and also to disseminate the same on their website.
Communicate to SEBI, the status of implementation of the provisions of this circular.
In case the Clearing Corporation (CC) foresees the possibility of negative/near zero prices in any commodity, then for such commodity derivatives, it shall activate an ARMF.
Shift to ARMF is conditional based on triggers including >50% price fall in 20 days, international benchmark measures, near-zero strike options, or price dropping below MPOR levels.
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.
In a scenario wherein the ARMF gets triggered, the prices shall be assumed to follow normal distribution. Therefore, volatility shall be based on the absolute differences in prices.
Floor value shall also be prescribed in absolute INR terms. The higher of the two values [percentage-based on absolute price vs absolute INR] shall be the applicable floor for the initial margin.
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Source: SecMarx — Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.