Markets regulator Sebi on January 27 rationalised margin framework for the commodity derivatives segment, wherein clearing corporations will have to categorise commodities as per their realised volatility. In addition, clearing corporations have been asked to prescribe floor values of initial margin as well as margin period of risk (MPOR) depending upon their categories, the Securities and Exchange Board of India (Sebi) said in a circular.
Given the wide variation of liquidity and volatility among different commodity derivatives, the regulator in consultation with other stakeholders has decided to rationalise the margin system.
Under the framework, clearing corporations (CCs) have been asked to categorise their commodities into three categories of volatility -- low, medium and high -- based on the realised volatility for the past three years.
In low volatility category, price variation should be up to 15 per cent, the same will be 15-20 per cent for medium and more than 20 per cent for commodities having high volatility.
Realised volatility will be calculated from series of daily log normal return of main near month future contracts of the respective commodity.
"The series of daily log normal return shall be rolled over to next month contract on start of staggered delivery period if it is applicable. If staggered delivery is not applicable then rollover shall be done on the day after the expiry of near-month contract," Sebi noted.
Clearing corporations of the lead exchange will do the categorisation of the commodities and the same will be intimated to and adopted by all other clearing corporations.
Lead exchange will be the one having the highest average daily turnover across all derivative contracts on the respective commodity based on the past six months' period.
In addition, the regulator has prescribed minimum initial margin and MPOR for agriculture and non-agriculture commodities based on volatility.
Margin, in market parlance, is the minimum fund an investor is required to pay to the broker before executing a trade. This is basically part of the money collected by bourses from traders upfront, before giving exposure for trading in derivatives.
Sebi has prescribed minimum initial margin of 8 per cent for commodities falling under low volatility, 10 per cent for medium volatility and 12 per cent for high volatility.
In case of non-agricultural commodities, minimum initial margin will be 8 per cent, 10 per cent and 12 per cent for low, medium and high volatility categories, respectively.
The capital markets watchdog further said the floor values prescribed for initial margin need not be scaled up by MPOR.
Sebi has fixed a minimum margin period of risk for agri commodities as 3 days each for low- and medium-volatile category and 4 days for high category, while the same for non-agriculture commodities is 2 days each for low- and medium-volatile categories and 3 days for those having high volatility.
The regulator has asked CCs to review the categories of all commodities once in every six months' period based on the past three years' data. The regulator, further, said commodity may be moved from higher volatility category to lower category only if it satisfies criteria of the revised category of volatility for two consecutive reviews.
However, movement from a lower to higher volatility category will be done based upon a single review.
The categorisation will be done on March 1 and September 1 of each year on a rolling basis and in case of any change, it will be applicable from April 1 and October 1 of each year.
In case derivatives are launched on any new underlying commodity for the first time for which no reference futures prices are available, Sebi said it will be initially categorised based upon prices available in the spot markets subject to a minimum of medium category of volatility.
Re-categorisation of such commodity from higher to lower category of volatility can only be done after two consecutive reviews, it added.
With regard to lean period in agri commodities, Sebi noted that during such period (before the arrival of new crop), there is often uncertainty about the arrivals of new crop, which may lead to higher volatility in prices of commodities and, therefore, asked CCs to levy additional lean period margin of 2 per cent on contracts expiring during lean period.
The lead exchange will determine the lean period in consultation with its relevant product advisory committee and disclose the same on its website.
Sebi said initial categorisation of commodities will be done by CCs within 15 days and the revised norms with regard to initial margin, MPOR and lean period margin need to be implemented by CCs in a phased manner and will be fully implemented within a period of three months.