India's market regulator, the Securities and Exchange Board of India (Sebi), is proposing significant changes. It plans to ease stress-testing and settlement guarantee fund norms for commodity derivatives clearing corporations. Simultaneously, Sebi is tightening rules on pledge invocation and withdrawing calendar spread margin benefits for single-stock derivatives on expiry day.
The Securities and Exchange Board of India (Sebi) is charting a course to modernize risk management frameworks within its financial markets. A consultation paper released today outlines proposed amendments aimed at aligning Indian commodity derivative clearing corporations with global best practices and streamlining operations.
Easing Commodity Derivative Risk Management
Central to these proposals is a reduction in the Z-score used for historical stress testing in commodity derivatives. Sebi suggests lowering this threshold from the current 10 to 5. This adjustment, supported by market participants who argued the existing level was overly conservative, aims to balance robust risk coverage with reduced margin and capital requirements. Furthermore, the core settlement guarantee fund coverage is set to be revised. Instead of factoring in 50% of the credit exposure from all clearing members' defaults, the new framework will focus on the simultaneous default of the top three clearing members posing the highest risk. These changes follow recommendations from Sebi's working group on agricultural commodity derivatives and its Risk Management Review Committee.
Investor Protection in Pledge Invocation
In parallel, Sebi is reinforcing investor safeguards concerning pledged securities. New rules mandate that lenders, or pledgees, must provide shareholders with reasonable notice before invoking and selling pledged shares held through the depository system. This move is designed to enhance transparency and ensure adherence to legal and contractual protections for investors.
Calendar Spread Margin Benefit Withdrawal
The regulator is also set to withdraw the calendar spread margin benefit for single-stock derivatives on the day of expiry. This aligns the treatment of these contracts with index derivatives. Previously, traders could leverage offsetting positions across different expiries with reduced margin requirements. This benefit will no longer be available for single-stock derivatives expiring on the same day, although margin calculations for positions involving other expiries will remain unaffected.
Relaxations for REITs and InvITs
Sebi is also exploring ease-of-doing-business measures for Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (InvITs). Proposed changes include greater flexibility in investment and borrowing norms, and revised treatment of Special Purpose Vehicles (SPVs) post-concession agreements. These include allowing InvITs to continue holding SPVs under certain conditions and expanding investment options for both REITs and InvITs into liquid mutual funds.
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