SEBI plugs systemic issue with new margin framework

Anomaly of penalty for ‘insufficient’ margins addressed

December 04, 2019 10:25 pm | Updated 11:14 pm IST - MUMBAI

The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai, India March 1, 2017. REUTERS/Shailesh Andrade - RTS10YF8

The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai, India March 1, 2017. REUTERS/Shailesh Andrade - RTS10YF8

The new margining system for commodity derivatives markets, which was announced by the Securities and Exchange Board of India (SEBI) on Friday last, has plugged a systemic issue wherein penalties were being levied on members even though there was no shortage of margins.

Current framework

Currently, the risk management framework for the commodity segment is similar to that of the equity market, which shuts at 3:30 pm.

Thereafter, the margin requirement is computed for members and the shortfall, if any, is collected on the same day. The commodity derivatives segment is, however, open till 11:30 pm for select commodities and hence the existing framework was not managing the margin requirement effectively.

For instance, if there is a spike in volatility post 3:30 pm, a shortage in margins could be reported even though the member has sufficient funds to meet the additional margin requirement. Importantly, due to insufficient margins being reported, penalties were being levied on members.

As per last week’s circular, the cut-off time for determining the margins has been fixed at 5 pm.

“The new circular issued on Friday on margining system takes care of this structural issue and it is a progressive step by SEBI for development of commodity markets,” said Narinder Wadhwa, president, Commodity Market Participants Association of India (CPAI).

Sanjit Prasad, MD and CEO, Indian Commodity Exchange (ICEX), said that the new framework would help in removing a ‘bottleneck’ that was being created due to the extra loss margin that is revised by the exchange based in intra-day volatility.

“Any upward revision in the margin calls for additional fund transfer by the members and clients to the exchange.Calling of margin by exchanges beyond banking hours posed a big hurdle to members and clients despite having funds available with them. The new cut-off time of 5 pm shall help in removing this bottleneck for all the bonafide members and their clients,” Mr. Prasad said.

Interestingly, while the long-pending demand of the commodity market participants has been met, a section of market players believes that SEBI should introduce the new framework soon rather than waiting till April 1, 2020.

“This has been a long pending demand of the commodity markets industry and we urge the regulator to implement it with immediate effect rather than wait till April 1, 2020,” said Manoj Jain, director, IndiaNivesh.

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