Sebi lays down more robust risk management framework for equity derivatives

Derivatives in financial markets typically refers to a forward, future, option or any other hybrid contract of pre-determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.

Press Trust of India December 18, 2018 11:03:28 IST
Sebi lays down more robust risk management framework for equity derivatives

New Delhi: Sebi on Monday put in place a more robust risk management framework with regard to margin system for the equity derivatives segment. The framework has been prepared on the basis of recommendation by Sebi's Risk Management Review Committee.

Now, the payment of mark to market margin (MTM) would mandatorily be made by all the members on T+0 basis -- before start of trading on the next day, as per a circular.

Currently, stock exchanges and clearing corporations offer a choice to the trading members to opt for payment of MTM either before the start of trading on the next day (T+0) or on the next day (T+1). This would be with scaled up margins to cover the potential for losses over the time elapsed in the collection of MTM.

To bring Margin Period of Risk (MPOR) in greater conformity with the principles for financial market infrastructures, Sebi has increased the margin period of risk to two days from one day at present.

Sebi lays down more robust risk management framework for equity derivatives

Sebi logo. Reuters image.

Additionally, the regulator has asked stock exchanges and clearing corporations to estimate the appropriate MPOR, subject to a minimum of two days, for each equity derivative product based on liquidity and scale up the initial margins and exposure margins accordingly.

For initial margins, the revised MPOR would be given effect by way of scaling up the 'price scan range' used for computing the worst scenario loss.

Under the principles for financial market infrastructures, central counter-party identify and consider a number of elements, including margin period of risk or close-out period, when constructing an appropriate margin system to address risks that arise from the products cleared.

The assumed margin period of risk incorporates the market depth and characteristics of the products cleared.

Derivatives in financial markets typically refers to a forward, future, option or any other hybrid contract of pre-determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.

Broadly, there are two types of derivative contracts -- futures and options.

A futures contract means a legally binding agreement to buy or sell the underlying security on a future date, while options contract gives the buyer or holder of the contract the right (but not the obligation) to buy or sell the underlying asset at a predetermined price within or at end of a specified period. PTI SP RAM

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

Bangalore stock exchange to apply for de-recognition to Sebi
Investing

Bangalore stock exchange to apply for de-recognition to Sebi

This approval was made by shareholders at the Annual General Meeting held here yesterday, attended by about 100 out of 925 members.

Managing directors at stock exchanges, depositories, clearing corporations to have two terms of 5 yrs each: Sebi
Business

Managing directors at stock exchanges, depositories, clearing corporations to have two terms of 5 yrs each: Sebi

The move comes after the board of Sebi in June approved changes to regulations governing Market Infrastructure Institutions

SEBI issues norms for interoperability among clearing corporations; to be operational by 1 June
Business

SEBI issues norms for interoperability among clearing corporations; to be operational by 1 June

The interoperability would permit trading members to clear trades through a firm of their choice instead of going through the CCP owned by the bourse on which the trade was executed.