SEBI introduces risk management framework for electronic gold receipts

The latest circular is part of a series of steps taken by SEBI to set up spot gold exchanges in India, starting with the Gold Exchange and SEBI (Vault Managers) Regulations of September 2021. It comes into force with immediate effect. Once the spot gold exchange is activated, EGR will be generated against physical gold deposited with the Vault Manager for trading (eg securities) on the EGR segment.

As per the circular, the liquid assets deposited by the members with the clearing corporation should be sufficient to meet the following requirements – mark-to-market (MTM) loss on outstanding settlement obligations of the member, value at risk (VAR) margin Probable loss up to 99.9% days to cover, excessive loss margin to cover positions outside the scope of VaR margin and any other margin as prescribed.

These liquid assets may include cash, bank fixed deposits, bank guarantees with limited exposure to any one bank, directly or indirectly, central government securities and liquid funds or units of government securities, and mutual funds.

The circular gives, among other things, further details on each of the above requirements. For example, the stock exchange will collect/adjust the MTM losses from the member/broker before the commencement of the next trading day. VaR margin will be collected on an upfront basis by adjusting it against the total liquid assets of the member at the time of trading. The excessive loss margin will be a minimum of 1% and will be collected/adjusted against the total liquid assets of the member on a real time basis. MTM loss and VaR and excessive loss margin will be collected on the gross open position of the member.

The Clearing Corporation shall be empowered to impose additional risk control measures in addition to those mandated by SEBI. While doing so, they must ensure that measures such as ad-hoc margins are introduced only to deal with situations that were not or were not anticipated while designing the risk management system.

Further, the Clearing Corporation will impose penalty on the Trading Member/Clearing Member for short-collection or non-collection of margin.