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The Securities and Exchange Board of India (Sebi) has introduced a risk management framework for the electronic gold receipt (EGR) segment on recognized stock exchanges.

The latest circular forms part of a series of steps, starting with the Gold Exchange and Sebi (Vault Managers) Regulations of September 2021, taken by Sebi to set up spot gold exchanges in India. It comes into effect immediately. Once spot gold exchanges are operationalized, EGRs will be created in exchange for physical gold deposited with a vault manager for trading (like securities) on the EGR segment.

According to the circular, liquid assets deposited by members with the Clearing Corporation must be adequate enough to cover the following requirements - mark-to-market (MTM) losses on outstanding settlement obligations of the member, value at risk (VaR) margins to cover potential losses for 99.9% of the days, extreme loss margins to cover situations outside the coverage of VaR margins and any other margins, as prescribed. 

These liquid assets can include cash, bank fixed deposits, bank guarantees with limits on exposure to a single bank directly or indirectly, central government securities and units of liquid funds or government securities, and mutual funds, among others.

The circular lays down further details on each of the above-mentioned requirements, among other things. For example, the stock exchanges shall collect/adjust MTM losses from the member/broker before the start of the trading of the next day. The VaR margin shall be collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. The extreme loss margin shall be minimum of 1% and will be collected/ adjusted against the total liquid assets of the member on a real time basis. The MTM loss and the VaR and extreme loss margins will be collected on the gross open position of the member.

The Clearing Corporations will have the right to impose additional risk containment measures over and above those mandated by Sebi. While doing so, they will have to ensure that such measures like ad-hoc margins are introduced only to deal with circumstances that cannot be or were not anticipated while designing the risk management system.

Also, the Clearing Corporations shall levy a penalty on the trading member/clearing member for short-collection or non-collection of margins.

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