Mumbai: The Securities and Exchange Board of India (Sebi) has announced a comprehensive risk management framework for commodity exchanges to bring them on par with the regulations for equity bourses. The new set of norms come just days after Sebi formally took over as the regulator for the commodities market on 28 September.

The framework lays down the proportion in which commodity exchanges can accept cash and non-cash margins from members, the manner in which mark-to-market settlement needs to be done in cash and asks these exchanges to set up a settlement guarantee fund (SGF) that can only be used for providing settlement guarantee.

Apart from cash and bank deposits, members can bring in mutual funds, corporate bonds having a rating of AA or above, bullion, gold exchange traded fund, steel and agricultural commodities as margin. However, agricultural commodities, that are accepted as collateral, have to be of the same quality as that is deliverable under the derivative contract.

While Sebi has allowed commodity exchanges to impose ad hoc margins over and above those stated in the circular, it has clarified that such margins should be levied only to deal with unanticipated circumstances and in a transparent manner.

“Any additional margins that the exchanges may impose shall be based on objective criteria and shall not discriminate between members on the basis of subjective criteria. Transparency is an important regulatory goal and therefore every effort must be made to make the risk management systems fully transparent by disclosing their details to the public," says the Sebi circular.

The capital markets watchdog has also stated that not more than 1% of the total liquid assets deposited with the exchange can be parked with a single bank which has a net worth of less than 500 crore. Further, cash equivalents have to be at least 50% of the liquid assets.

Sebi has laid down a base minimum capital (BMC) requirement of 10 lakh for members without algorithmic trading facility and 50 lakh for those who provide algorithmic trading facility. While 25% of the BMC can be in the form of cash, the balance can be in the form of fixed deposits or bank guarantees.

The provisions of the Sebi circular have to be implemented by commodity exchanges by 1 January.

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