Sebi Rationalises Margin System In Commodity Derivatives

Mumbai, January 28: The Securities and Exchange Board of India (Sebi) on January 27, 2020, rationalised the margin framework for commodity derivatives in consultation with other stakeholders. Given the backdrop of wide variation of liquidity and volatility among different commodity derivatives, Sebi decided to categorise commodities as per their realised volatility and prescribed floor values for minimum value for Initial Margin (IM) and Margin Period of Risk (MPOR) based on their categories. The clearing corporations (CCs) are requested to categorise their commodities into three different categories based upon the realised volatility for last three years. 

The commodity category is divided into low, medium and high. For realised annualised volatility, the criteria are 0 to 15 per cent for low category, above 15 per cent to 20 per cent for the medium category and above 20 per cent for the high category. “Realized volatility shall be calculated from a series of daily log normal return of main near month future contracts of the respective commodity. The series of daily log normal return shall be rolled over to next month contract on start of staggered delivery period if it is applicable. If staggered delivery is not applicable, then rollover shall be done on the day after the expiry of near month contract,” said Sebi in its circular. 

Further, as per market regulator, the exchange that has maximum average daily turnover across all derivative contracts on the respective commodity on the basis of last six months’ period would be termed as Lead Exchange. The CC of the lead exchange are expected to do the categorisation of the respective exchanges as well as they should be reviewing the categories of all commodities once in every six months’ period based on past three years’ data.

“Commodity may be moved from higher volatility category to lower category only if it satisfies the 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,” pointed out Sebi.  The CCs are also requested to disclose detailed break up of various margins on contracts clearly along with assigned volatility risk on their websites.