SEBI revises settlement guarantee fund norms for commodity derivatives clearing corporations

The Securities and Exchange Board of India

• SEBI revises SGF rules for commodity derivatives clearing firms
• Stress tests now need default of 3+ clearing members
• SEBI may exempt SGF rules based on market conditions

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Market regulator Securities and Exchange Board of India (SEBI) has revised the rules related to the Settlement Guarantee Fund (SGF) for clearing corporations operating in the commodity derivatives segment.

In a circular issued on Monday, SEBI said the change has been made after receiving representations from market participants, recommendations from the Risk Management Review Committee (RMRC), and feedback from public consultation. The move is aimed at facilitating ease of doing business while maintaining risk management safeguards.

Under the earlier framework, clearing corporations were required to conduct stress tests assuming the simultaneous default of at least two clearing members and their associates that would create the highest credit exposure. They also had to consider 50 percent of the credit exposure arising from the simultaneous default of all clearing members. Circular stated, “For each of the scenarios in Part A, Clearing Corporations shall calculate the credit exposure due to simultaneous default of at least 3 clearing members (and their associates) causing highest credit exposure.”

SEBI has now modified this requirement. Clearing corporations will instead have to calculate the credit exposure arising from the simultaneous default of at least three clearing members and their associates that create the highest credit exposure in each stress scenario.

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The Settlement Guarantee Fund (SGF) acts as a safety buffer maintained by clearing corporations to ensure that trades are settled even if a member default. Stress testing helps determine whether the fund has enough resources to handle extreme market situations.

In addition, SEBI has inserted a new provision allowing the regulator to grant exemptions or relaxations from strict enforcement of SGF rules in the commodity derivatives segment on a case-by-case basis. SEBI circular stated, “Such exemptions may be considered after taking into account the prevailing market conditions, the adequacy of applicable risk management framework and keeping in view the overall objective of investor protection.”

According to the circular, such relaxations may be considered after considering market conditions, the strength of the risk management framework, and the broader objective of investor protection.

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