Capital markets regulator Sebi on Monday put in place an elaborate risk management framework for electronic gold receipts.
The watchdog has issued a circular pertaining to Electronic Gold Receipts (EGRs) that covers various aspects, including margin collection, provision of early pay-in of funds for EGR, short-collection or non-collection of client margins, risk reduction mode and settlement.
The circular will come into force with immediate effect.
In December 2021, the government had notified EGRs as 'securities' under the Securities Contracts (Regulation) Act 1956. The same month, Sebi notified rules for vault managers paving the way for operationalising the gold exchange.
Pursuant to the notifications, Sebi issued several frameworks for operationalising the gold exchange, wherein the yellow metal will be traded in the form of EGRs.
The entire transaction has been divided into three tranches -- creation of EGR, trading of EGR on stock exchange and conversion of EGR into physical gold.
As per the latest circular, the core of the risk management system is the liquid assets deposited by trading members with the Clearing Corporation (CC).
These liquid assets will cover the requirements -- Mark to Market (MTM) losses (MTM losses on outstanding settlement obligations of the member); Value at Risk (VaR) margins (VaR to cover potential losses for 99.9 per cent of the days); and extreme loss margins (margins to cover the expected loss in situations that lie outside the coverage of the VaR margins).
The liquid assets of the member will, at all times, be adequate to cover all these requirements, Sebi said.
According to the watchdog, clearing corporations can levy a penalty on Trading Members (TMs) or Clearing Members (CMs) for short collection or non-collection of margins. The penalty will be collected by the clearing corporations within five days of the last working day of the trading month and credited to its Settlement Guarantee Fund (SGF).
Stock exchanges and clearing corporations, in all segments, in consultation with one another, have been asked to devise a standard framework for imposition of fine on the TM/CM for incorrect/false reporting of margin collected from the clients.
Considering the principle of 'proportionality', Sebi said the fine should 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 and repeated violations, among others.
The amount of fine to be charged upon the member may extend to 100 per cent of such false/incorrect amount of margin and/or suspension of trading for an appropriate number of days, it added.
With respect to risk reduction mode, Sebi said that clearing corporations will have to ensure that stock brokers and clearing members are mandatorily put in risk-reduction mode when 90 per cent of the member's collateral available for adjustment against margins gets utilised on account of trades that fall under a margin system including crystalised losses.
''All unexecuted orders shall be cancelled once stock broker/clearing member breaches 90 per cent collateral utilisation level,'' the regulator said.
It, further, said that settlement of EGR will be on T+1 (trading plus one) rolling basis.
The regulator has directed the clearing corporations to maintain a separate core Settlement Guarantee Fund (SGF) for the EGR segment. They are required to have a minimum corpus of Rs 10 crore for SGF.
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