CIRCULAR
SEBI/HO/CDMRD/CDMRD_DRM/P/CIR/2022/50 April 11, 2022
The Managing Directors / Chief Executive Officers
All Stock Exchanges and Clearing Corporations
Sir / Madam,
Subject: Comprehensive Risk Management Framework for Electronic Gold
Receipts (EGR) segment
1. SEBI Board in its meeting held on September 28, 2021 approved the framework
for Gold Exchange and SEBI (Vault Managers) Regulations, 2021.
2. Government of India vide Gazette notification S.O. 5401 (E) dated December 24,
2021, has notified “electronic gold receipts” as ‘securities’ under Section 2(h)(iia)
of the Securities Contracts (Regulation) Act 1956, and vide Gazette notification
dated December 31, 2021, SEBI (Vault Managers) Regulations, 2021, have been
notified, paving the way for operationalization of Gold Exchange. Pursuant to the
said notifications, various circulars were issued specifying the framework for
operationalizing the Gold Exchange in India.
3. In continuation to the aforesaid circulars, the risk management framework
applicable to the EGR segment on the recognized Stock Exchange/s is prescribed
in Annexure A to this circular.
4. This circular shall come into force with immediate effect.
5. This circular is issued in exercise of the powers conferred under Section 11 (1) of
the Securities and Exchange Board of India Act, 1992, to protect the interests of
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investors in securities and to promote the development of, and to regulate the
securities market.
6. This circular is issued with the approval of competent authority.
7. This circular is available on SEBI website at www.sebi.gov.in under the category
“Circulars” and “Info for Electronic Gold Receipts”.
Yours faithfully,
Priyanka Mahapatra
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
priyankam@sebi.gov.in
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ANNEXURE A
COMPREHENSIVE RISK MANAGEMENT FRAMEWORK FOR EGR SEGMENT
MARGINS
1. Overview
The core of the risk management system is the liquid assets deposited by members
with the Clearing Corporation (CC). These liquid assets shall cover the following
requirements:
1.1. MTM (Mark to Market) Losses: Mark to market losses on outstanding
settlement obligations of the member.
1.2. VaR Margins: Value at risk margins to cover potential losses for 99.9% of the
days.
1.3. Extreme Loss Margins: Margins to cover the expected loss in situations that lie
outside the coverage of the VaR margins.
1.4. Any other margins as may be prescribed.
The liquid assets of the member shall, at all times, be adequate to cover all the above
requirements.
2. Liquid Assets
The type of liquid assets, applicable haircuts and concentration limits are listed below:
Item Minimum Haircut Limits
(Note ‘a’)
Cash Equivalents
Cash 0 No limit
Bank fixed deposits 0 No limit (Note i)
Bank guarantees 0 Limit on Stock
Exchange’s exposure
to a single bank.
(Note ‘b’)
Securities of the Central 2%/5%/10% (Note ‘k’) No limit
Government
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Item Minimum Haircut Limits
(Note ‘a’)
Units of liquid mutual 10% No limit
funds or government
securities mutual funds
(by whatever name
called which invest in
government securities)
Other Liquid Assets
Liquid (Group-I) Same as the VaR margin Limit on Stock
Equity Shares (Note ‘d’) for the respective shares Exchange’s exposure
(Note ‘d’) to a single
issuer (Note ‘e’)
Mutual fund units other Same as the VaR margin
than those listed under for the units computed
cash equivalents using the traded price on
Stock Exchange, if
available, or else, using the
NAV of the unit treating it
as a liquid security
Corporate Bonds having Fixed percentage based or Not to exceed 10% of
rating of AA or above VaR based Haircut. A the total liquid assets
(or with similar rating higher haircut may be of the clearing
nomenclature) by considered to cover the member.
recognized credit rating expected time frame for (Note ‘e’)
agencies liquidation. To begin with
the haircut shall be a
minimum of 10%
Gold ETF /Bullion (Note 20% Gold ETF/Bullions as
‘j’) collateral for any
clearing member
shall not exceed 30%
of the total liquid
assets of the clearing
member (Note ‘f’)
EGR 20% No limit
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Item Minimum Haircut Limits
(Note ‘a’)
Notes:
a. The valuation of the liquid assets shall be done on a daily basis after
applying applicable haircuts.
b. The Stock Exchange shall lay down exposure limits either in rupee terms
or as percentage of the total Liquid Assets that can be exposed to a single
bank directly or indirectly. The total exposure towards any bank would
include Bank Guarantees issued by the bank as well as debt or equity
securities of the bank which have been deposited by members towards
total liquid assets. Not more than 1% of the total liquid assets deposited
with the Stock Exchange, shall be exposed to any single bank which has a
net worth of less than INR 500 crores and is not rated P1 (or P1+) or
equivalent, by a recognized credit rating agency or by a reputed foreign
credit rating agency, and not more than 10% of the total liquid assets
deposited with the Stock Exchange shall be exposed to all such banks put
together.
c. Cash equivalents shall be at least 50% of liquid assets. This would imply
that Other Liquid Assets in excess of the total Cash Equivalents would not
be regarded as part of member’s liquid assets as well as total liquid assets.
d. For determination of which equity shares are falling in Group-I and what
would be the appropriate VaR margin for these securities, data
disseminated by Stock Exchanges having equity platform shall be referred.
e. Stock Exchanges shall adequately diversify their collateral so as to avoid
any concentration of exposure towards any single entity and the same shall
be within the limits as may be prescribed by SEBI from time to time.
f. Bullion to be accepted as collateral should be of same quality specification
which is deliverable under the contract specification of commodity
derivatives being traded on the Stock Exchange.
g. Stock Exchanges shall accept liquid assets as collateral only as per the list
of liquid assets specified in the table above. However, Stock Exchanges may
decide not to accept certain type of liquid assets specified in the above list
based on their risk perception, capability to hold and arrangements for
timely liquidation. Stock Exchanges may stipulate concentration limits at
member level / across all members as may be necessary.
h. Stock Exchanges shall make necessary arrangements to enable timely
liquidation of collaterals accepted by them.
i. Stock Exchanges shall not accept Fixed Deposit Receipts (FDRs)/ Bank
Guarantees (BGs) from trading/clearing members as collateral, which are
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Item Minimum Haircut Limits
(Note ‘a’)
issued by the trading/clearing member themselves or banks who are
associate of trading/ clearing member.
Explanation –for this purpose, 'associate' shall have the same meaning as
defined under SECC Regulations.
j. Gold on which EGR has not been issued
k. Haircuts as per Circular No.: SEBI/HO/MRD/DRMNP/CIR/P/2019/33
Dated Feb 21, 2019
3. Mark to Market Losses
Mark to Market Losses shall be collected in the following manner:
3.1. The Stock Exchanges shall collect/adjust mark to market losses (MTM) from the
member/broker before the start of the trading of the next day.
3.2. The MTM losses shall be collected/adjusted from/against the cash/cash
equivalent component of the collateral deposited with the stock exchange.
3.3. The MTM losses shall be collected on the gross open position of the member. The
gross open position for this purpose would mean the gross of all net positions for
all the clients of a member including his proprietary position. For this purpose,
the positions of all the clients of a broker would be grossed. Further, there would
be no netting across two different settlements.
3.4. There would be no netting off the positions and setoff against MTM profits across
2 rolling settlements i.e. T day and T-1 day. However, for computation of MTM
profits/losses for the day, netting or setoff against MTM profits would be
permitted.
3.5. The MTM losses so collected shall be released along with the pay-in, including
early pay-in of EGR.
4. VaR Margin
4.1. Computation of VaR Margin
The VaR Margin is a margin intended to cover the highest loss that can be
encountered on 99.9% of the days (99.9% Value at Risk). The VaR Margin would
be based on 6σ, subject to minimum initial margin of 9%.
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4.2. Collection of VaR Margin
4.2.1. The VaR margin shall be collected on an upfront basis by adjusting against
the total liquid assets of the member at the time of trade.
4.2.2. The VaR margin shall be collected on the gross open position of the
member. The gross open position for this purpose would mean the gross
of all net positions across all the clients of a member including his
proprietary position.
4.2.3. For this purpose, there would be no netting of positions across different
settlements.
4.2.4. The value of λ, the parameter which determines how rapidly volatility
estimation changes in the Exponentially Weighted Moving Average
(EWMA) method shall be considered at 0.995.
4.2.5. The VaR margin so collected shall be released along with the pay-in,
including early pay-in of EGR.
4.3. Updation of VaR Margin rate
The applicable VaR margin rate shall be updated at least at beginning of day, end
of day and interval of not later than two hours, during the trading period.
5. Extreme Loss Margin
It covers the expected loss in situations that go beyond those envisaged in the 99.9%
value at risk estimates used in the VaR margin.
5.1. The Extreme Loss Margin shall be minimum of 1 %.
5.2. The Extreme Loss Margin shall be collected/ adjusted against the total liquid
assets of the member on a real time basis.
5.3. The Extreme Loss Margin shall be collected on the gross open position of the
member. The gross open position for this purpose would mean the gross of all
net positions across all the clients of a member including his proprietary
position.
5.4. For this purpose, there would be no netting of positions across different
settlements.
5.5. The Extreme Loss Margin so collected shall be released along with the pay-in
including early pay-in of EGR.
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6. Any other Margins
Clearing Corporations will have the right to impose additional risk containment
measures over and above the risk containment system mandated by SEBI. However,
the Clearing Corporations should keep the following factors in mind while taking such
action:
6.1. Additional risk management measures (like ad-hoc margins) would normally be
required only to deal with circumstances that cannot be anticipated or were not
anticipated while designing the risk management system. If ad-hoc margins are
imposed with any degree of regularity, Clearing Corporations should examine
whether the circumstances that give rise to such margins can be reasonably
anticipated and can therefore be incorporated into the risk management system
mandated by SEBI. Clearing Corporations are encouraged to analyse these
situations and bring the matter to the attention of SEBI for further action.
6.2. Any additional margins that the Clearing Corporations may impose shall be
based on objective criteria and shall not discriminate between members on the
basis of subjective criteria.
7. Margin provisions for intra-day crystallised losses
7.1. The intra-day crystallised losses shall be monitored and blocked by Clearing
Corporations from the free collateral on a real-time basis only for those
transactions which are subject to upfront margining. For this purpose,
crystallised losses can be offset against crystallised profits at a client level, if
any.
7.2. If crystallised losses and applicable margins (as defined above) exceed 90% of
the free collateral available with the Clearing Corporation, then the entity shall
be put into risk reduction mode as given under para 17.
7.3. Crystallised losses shall be calculated based on weighted average prices of
trades executed.
7.4. Adjustment of intraday crystallised losses shall not be done from exposure free
deposit of the clearing member.
8. Provision of Early Pay-in
8.1. Necessary systems shall be put in place to enable early pay-in of funds/ EGR. In
cases where early pay-in of funds/EGR is made by the members, the
outstanding position to that extent of early pay-in shall not be considered for
computing the margin obligations.
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8.2. Necessary systems shall be put in place so as to enable adjustment of the pay-
in obligations of the members from the cash component of the liquid assets
deposited by them.
REPORTING AND VERIFICATION OF MARGINS
9. Collection and reporting of margins by Trading Member (TM) /Clearing
Member (CM)
9.1. The ‘margins’ for this purpose shall mean VaR margin, Extreme Loss Margin
(ELM), Mark to Market losses (MTM) or any other margin as prescribed by the
Clearing Corporation/ SEBI to be collected by TM/CM from their clients.
9.2. The TMs/CMs are required to mandatorily collect upfront VaR margins and ELM
from their clients. The TMs/CMs will have time till ‘T+1’ working days to collect
margins (except VaR margins and ELM) from their clients. (The clients must
ensure that the VaR margins and ELM are paid in advance of trade and other
margins are paid as soon as margin calls are made by the TMs/CMs.
9.3. The TM/CM shall be exempted from collecting upfront margins from the
institutional investors and in cases where early pay-in of securities is made by
the clients.
9.4. The TMs/CMs shall report to the CC on T+5 day the actual short-collection/ non-
collection of all margins from clients.
10. Framework to Enable Verification of Upfront Collection of Margins
10.1. The provisions related to framework to enable verification of upfront collection
of margins shall be same as specified for equity cash segment in SEBI circular no.
SEBI/HO/MRD2/DCAP/CIR/P/2020/127 dated July 20, 2020 and its
subsequent amendments if any, as carried out from time to time.
11. Short-collection/Non-collection of client margins
11.1. Clearing Corporations shall levy following penalty on TM/CM for short-
collection/non-collection of margins:
For each member
Per day penalty as %age of ‘a’
‘a’
(<Rs 1 lakh) And (< 10% of
0.5
applicable margin)
(≥ Rs 1 lakh) Or (≥ 10% of
1.0
applicable margin)
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Where a = Short-collection/non-collection of margins per client per segment per
day
11.2. If short/non-collection of margins for a client continues for more than 3
consecutive days, then penalty of 5% of the shortfall amount shall be levied for
each day of continued shortfall beyond the 3rd day of shortfall.
11.3. If short/non-collection of margins for a client takes place for more than 5 days in
a month, then penalty of 5% of the shortfall amount shall be levied for each day,
during the month, beyond the 5th day of shortfall.
11.4. All instances of non-reporting shall amount to 100% short collection and the
penalty as applicable shall be charged on these instances in respect of short
collection.
11.5. The penalty shall be collected by the Clearing Corporation within five days of the
last working day of the trading month and credited to its SGF.
11.6. The margin statement which is forwarded on a daily basis by the broker to the
clients shall include a column stating the margin charged by the Stock
Exchange/Clearing Corporation.
11.7. When penalty is being collected by a broker for short collection/ non-collection
of other than upfront margins from a client, then the broker shall provide the
relevant supporting documents to the client.
11.8. If TM/ CM collects minimum 10% upfront margin in lieu of VaR and ELM from
the client, then penalty for short-collection/ non-collection of margin shall not be
applicable. However, it is reiterated that CC shall continue to collect the upfront
margin from the TM/ CM based on VaR and ELM.
11.9. In respect of penalty for non-collection of “other margins” (other than VaR and
ELM) on or before T+1 days from clients by TM/ CM, following is clarified:
11.9.1. If pay-in (both funds and EGR) is made by T+1 working days, the other
margins would have deemed to have been collected and penalty for short/
non collection of other margins shall not arise.
11.9.2. If Early Pay-In of EGR has been made to the Clearing Corporation (CC), then
all margins would be deemed to have been collected and penalty or short/
non-collection of margin including other margins shall not arise.
11.9.3. If client fails to make pay-in by T+1 working days and TM/ CM do not collect
other margins from the client by T+1 working days, the same shall also
result in levy of penalty as applicable.
12. Rationalization of imposition of fines for false/incorrect reporting of margins
by TM/CM
12.1. For instances where a member has reported falsely the margin collected from
clients and the same is found out during inspections:
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12.1.1. The Stock Exchanges and Clearing Corporations, in all segments, in
consultation with one another, shall devise a standard framework for
imposition of fine on the TM/CM for incorrect/false reporting of margin
collected from the clients.
12.1.2. Considering the principle of ‘proportionality’, the fine shall be
charged to the member based on the materiality of non-compliance done
by the member which may include factors such as number of instances,
repeated violations, etc. The amount of fine to be charged upon the
member may extend to 100% of such false/incorrectly amount of margin
and/or suspension of trading for appropriate number of days.
13. Margining of Institutional Trades in EGR segment
13.1. Margining of institutional trades shall be as per provisions of equity cash
segment for stocks under T+1 settlement.
14. Shortfall of Margins/ Pay-in of funds by Members
14.1. Margin shortfall: In case of any shortfall in Margin, the terminals of the broker
shall be immediately deactivated for fresh positions and will only be allowed to
square-off existing positions.
14.2. Pay-in shortfall:
14.2.1. In cases where the amount of shortage in a settlement for a clearing
member is in excess of the deposit prescribed as per SEBI (Stock Brokers)
(Amendment) Regulations,2022, the clearing facility of the member shall
be withdrawn and the EGR pay-out due to the member shall be withheld.
14.2.2. In cases where the amount of shortage exceeds 20% of the deposit but
less than the deposit on six occasions within a period of three months,
then also the clearing facility of the member shall be withdrawn and the
EGR pay-out due to the member shall be withheld.
14.2.3. Upon recovery of the complete shortages, the member shall be permitted
to provide clearing facility subject to his providing a deposit equivalent to
his cumulative funds shortage as the 'funds shortage collateral'. Such
deposit shall be kept with the Clearing Corporation for a period of ten
rolling settlements and shall be released thereafter. Such deposit shall not
be available for adjustment against margin liabilities and also not earn any
interest. The deposit may be by way of cash, fixed deposit receipts or bank
guarantee.
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14.2.4. Clearing Corporations would have discretion to prescribe stricter criteria
for these provisions.
15. Collateral deposited by Clients with brokers
15.1. Provisions related to deposit, segregation and monitoring of collaterals of
clients by brokers shall be as per SEBI Circular No. MRD/DoP/SE/Cir- 11/2008
dated April 17, 2008 and SEBI circular No
SEBI/HO/MRD2_DCAP/CIR/2021/0598 dated July 20, 2021 and their
subsequent amendments, if any, as carried out from time to time.
16. EGR as margin obligation to be given by way of pledge/re-pledge in the
depositary system
16.1. Provisions related to use of EGR as margin obligation to be given by way of
pledge/re-pledge in the depositary system shall be as per SEBI circular No.
SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020 and SEBI
Circular No. SEBI/HO/MIRSD/DOP/CIR/P/2020/143 dated July 29, 2020 and
their subsequent amendments, if any, as carried out from time to time.
17. Risk Reduction Mode
17.1. Clearing Corporation shall ensure that the stock brokers and clearing members
are mandatorily put in risk-reduction mode when 90% of the member’s
collateral available for adjustment against margins gets utilized on account of
trades that fall under a margin system including crystalized losses. Such risk
reduction mode shall include the following:
17.1.1. All unexecuted orders shall be cancelled once stock broker/clearing
member breaches 90% collateral utilization level.
17.1.2. Only orders with Immediate or Cancel attribute shall be permitted in this
mode.
17.1.3. All new orders shall be checked for sufficiency of margins.
17.1.4. Non-margined orders shall not be accepted from the stock
broker/clearing member in risk reduction mode.
17.1.5. The stock broker/clearing member shall be moved back to the normal risk
management mode as and when the collateral of the stock
broker/clearing member is lower than 85% utilization level.
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17.2. Clearing Corporations may prescribe more stringent norms based on their
assessment, if desired.
ACTIVITY SCHEDULE
18. Rolling settlement
Settlement of EGR shall be on T+1 rolling basis. Transactions shall be settled on gross
basis at the clearing member level. Netting shall be done at client level. The funds shall
be settled on gross basis at member level.
19. Activity Schedule for T+1 Rolling Settlement
The activity schedule is as under:
Sr. No. Day Time Description of activity
1 T Trade Day
By 2.00 AM Completion of process and download
provisional obligation files to stock brokers/
custodians by the Clearing Corporation.
By 2.00 PM Funds and EGR pay-in
2 T+1
By 4.30 PM Funds and EGR pay-out
Custodian confirmations shall happen before beginning of T+1.
20. Settlement of Funds
20.1. Clearing Corporation shall empanel clearing banks based on various financial
and operational criteria. Clearing members shall open single settlement
account with any of the clearing banks.
20.2. The paying member shall have clear funds in settlement account on settlement
day. The Clearing Bank shall debit the paying members' account. in accordance
with electronic instructions received from Clearing Corporation. The Clearing
Bank shall credit the receiving members' settlement account in accordance
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with the pay-out instructions received electronically from the Clearing
Corporation on the settlement day.
21. Settlement of EGR
21.1. Members shall be required to maintain account with depositories including a
pool account.
21.2. Members shall provide specific delivery instructions in favour of the clearing
corporation on the settlement day. The delivering member shall complete
delivery instructions for transfer of EGR to Clearing Pool Account on settlement
day by the specified pay-in time.
21.3. The depositories shall credit the receiving members' pool account/ clients
beneficiary account in accordance with the pay-out instructions received
electronically from Clearing Corporation on the settlement day by the specified
pay-out time.
21.4. Depositories/Clearing Corporation shall provide following facilities as under:
21.4.1. Facility for early pay-in
21.4.2. Auto delivery out and
21.4.3. Client direct pay-out
22. Settlement of Transaction in case of Holidays
22.1. The Clearing Corporation shall clear and settle the trades on a sequential basis
i.e., the pay-in and the pay-out of the first settlement shall be completed before
the commencement of the pay-in and pay-out of the subsequent settlement(s).
22.2. The cash/EGR pay out from the first settlement shall be made available to the
member for meeting his pay-in obligations for the subsequent settlement(s).
22.3. The Stock Exchanges/Clearing Corporations shall follow a strict time schedule
to ensure that the settlements are completed on the same day.
22.4. The Clearing Corporation shall execute Auto DO facility for all the settlements
together, so as to make the funds and the EGR available with the member on the
same day for all the settlements, thereby enabling the availability of the
funds/EGR at the client level by the end of the same day.
22.5. If the settlement holiday is unscheduled (on account of strike etc.) the clubbing
of settlement at the last minute may not be possible and the provision of SEBI
letter (ref. No. SMD/Policy/25249/2001 dated March 19, 2001 to Stock
Exchanges) shall be applicable.
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EGR PAY-IN SHORTAGES
23. Activity schedule for Auction Session
23.1. Rolling settlement for T day trade
Sr. No. Day Description of activity
1 T Trade Day
2 T+1 Pay-in/Pay-out of EGR and funds
Auction settlement for T day trade
3 By T+1 Auction session
4 By T+2 Pay-in/pay-out and close-out of auction
23.2. In case of bank holidays, when multiple settlements (say S and S ) are
1 2
conducted on the same day (say T ), on the working day immediately following
m
the day(s) of the closure, the auction session shall be as under:
23.2.1. The auction of first settlement (S ) shall be conducted on the same day
1
(T ) and settled by next day (T +1).
m m
23.2.2. The auction for the second settlement (S ) shall be conducted on the next
2
day (T +1) along with the shortages/auction of that day. The settlement
m
of the same shall happen by the subsequent day (T +2).
m
24. Close-out Procedure
24.1. The Close-out Procedure shall be as below:
"The close out Price shall be the highest price recorded in that EGR on the Stock
Exchange from the date of trading and up to the date of auction/close out
OR
3% above the latest available closing price at the exchange on the day on which
auction offers are called for
WHICHEVER IS HIGHER
25. Proceeds from Auction/ Close-out
25.1. The proceeds from Auction/ Close-out shall be used to settle the claim of the
aggrieved party. Any amount remaining thereof shall be credited to the Core
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Settlement Guarantee Fund instead of crediting it to the defaulting party’s
account.
SETTLMENT GUARANTEE FUND
26. Settlement Guarantee Fund, Default Waterfall and Stress Testing
26.1. Clearing Corporations shall maintain a separate core settlement guarantee fund
(Core SGF) for EGR segment. Clearing Corporations shall comply with SEBI
circular No. CIR/MRD/DRMNP/25/2014 dated August 27, 2014 for norms
related Core SGF, Stress Testing and Default Waterfall in EGR segment. (as
applicable for equity cash segment) and their subsequent amendments, if any,
as carried out from time to time. For computation of stress loss, loss on EGR
pay-in failure, shall be calculated as minimum margin plus close out rate in EGR
segment.
26.2. Clearing Corporations shall have a minimum corpus of SGF of INR 10 crores.
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