Introduction:

The Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) vide circular[1] dated May 02, 2018, has specified certain additional risk management measures that are required to be complied with and implemented by the stock exchanges/ clearing corporations for the derivatives segment. The circular came into effect on June 01, 2018.

Margin Collection and Enforcement Requirement:

SEBI has specified the mandate for the equity derivatives segment that the following shall be included in the client margins which shall be collected and reported by the trading members to the Stock Exchange, and by clearing members to the Clearing Corporation:

  1. initial margin;
  2. exposure margin/ extreme loss margin;
  3. calendar spread margin; and
  4. mark to market settlements.

Further, drawing reference from SEBI circular[2] dated August 10, 2011, regarding collection of client margins, it has been clarified that ‘margins’ shall include any margin as prescribed by the Stock Exchange or Clearing Corporation to be collected by Clearing Members or Trading Members, as the case may be.

Computation of Liquid Net worth:

SEBI also drew reference from its circular[3] dated July 28, 1999 and clarified that the liquid net worth shall be arrived in the following manner

Liquid net worth = the liquid assets of the clearing member - initial margin - exposure margin/extreme loss margin

Additional steps:

SEBI also directed the Stock Exchanges and Clearing Corporations to ensure that systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations are put in place. Also, SEBI directed to communicate to SEBI, the status of implementation of the provisions of this circular in the Monthly Report.

Remarks:

The above additional risk management measures have been introduced after taking into account feedback from the clearing corporations and the recommendations of SEBI’s risk management review committee. However, the real challenge lies in ensuring that appropriate systems for implementation of the circular are put in place.