SEBI Revises SGF Norms for Commodity Derivatives, Eases Capital Burden for Clearing Corporations

The Securities and Exchange Board of India (SEBI) has revised the settlement guarantee fund (SGF) framework for the commodity derivatives segment, aiming to improve ease of doing business while maintaining robust risk management standards.

The changes, announced through a circular dated March 16, follow feedback from market participants and public consultation. The revised norms primarily alter stress testing requirements and introduce flexibility in regulatory enforcement.

Stricter Stress Testing Framework Introduced

Under the updated guidelines, clearing corporations will now be required to conduct stress tests assuming the simultaneous default of at least three clearing members, along with their associates.

This marks a shift from the earlier framework, where exposure calculations were based on the default of only two clearing members.

“For each of the scenarios… clearing corporations shall calculate the credit exposure due to simultaneous default of at least three clearing members… causing the highest credit exposure,” SEBI said in its circular.

The move is expected to strengthen risk assessment practices by better capturing extreme but plausible market stress scenarios.

Removal of Earlier Exposure Provision

SEBI has also removed a key requirement under the previous framework that mandated clearing corporations to consider 50% of the credit exposure arising from the simultaneous default of all clearing members.

The elimination of this provision could reduce the overall size of the settlement guarantee fund that clearing corporations are required to maintain.

The SGF acts as a financial safety buffer to ensure settlement of trades in case of member defaults, particularly during periods of heightened market volatility. Stress testing helps determine whether the fund has sufficient resources to handle such extreme situations.

Regulatory Flexibility and Capital Relief

In a notable addition, SEBI has introduced a provision allowing the regulator to grant exemptions or relaxations from SGF norms on a case-by-case basis.

Such decisions will be based on prevailing market conditions, the robustness of risk management frameworks, and broader investor protection objectives.

This flexibility is expected to ease compliance burdens and reduce capital requirements for clearing corporations and their members, potentially improving liquidity and efficiency in the commodity derivatives market.

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Conclusion

The revised SGF framework reflects SEBI’s attempt to strike a balance between strengthening risk management and reducing operational constraints for market participants.

While stricter stress testing enhances resilience against defaults, the removal of certain provisions and introduction of regulatory flexibility could lower capital burdens.

The changes, which have come into effect immediately, are likely to support more efficient functioning of clearing corporations without compromising investor protection.

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