Sebi firms up risk management guidelines in commodity futures trade

The Securities and Exchange Board of India (Sebi) has prescribed higher margins for futures trade in both agricultural and non-agricultural commodities to address the risk of default in cases of high volatility.


For the first time, it has provided options for clearing corporations to divide commodities into three broad categories, depending on realised volatility over the previous three years. If actual annualised volatility was between nil and 15 per cent, the contract would be in a low volatility category. If between 15 and 20 per cent, medium; if above 20 per cent, a highly volatile category.


“Realised volatility shall be calculated from the series of daily log normal return of the main near-month futures contracts of the respective commodity. The series of daily log normal return shall be rolled over to the next-month contract on start of staggered delivery period if applicable. If not applicable, rollover shall be done on the day after the expiry of near-month contracts,” Sebi clarified through a circular. Also, that the exchange having the highest average daily turnover across all derivatives contracts in a commodity, based the past six months, shall be termed a lead exchange. The clearing corporation of the lead exchange shall categorise all commodities; this shall be intimated to and adopted by all other clearing corporations.


Sebi has also prescribed the margin period of risk (MPOR, the number of days these margins are to continue), which may vary in three broad categories of two, two and three for non-agri, and three, three and four for agri commodities in low, medium and high volatility categories, respectively.


Also, clearing corporations are to review the categories of all commodities every six months, based on the past three years’ data. A commodity may be moved from a higher to a lower volatility category only if it satisfies the criteria for the revised category for consecutive reviews.


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