SEBI Releases New Risk Management Framework for EGR Trading

SEBI (Securities and Exchange Board of India) has issued a new risk management framework for gold to be traded in the form of 'Electronic Gold Receipts' (EGRs).

Plans to allow stock exchanges to launch new gold exchanges were first announced in India's budget for FY 2021-22. In September 2021, SEBI approved a proposal allowing for gold to be traded in the form of EGRs, with clearing and settlement features akin to any other securities.

In January this year, SEBI issued a framework for the operationalisation of gold exchanges in India through, dividing the EGR segment into three tranches: the creation of EGRs, trading of EGRs on stock exchange, and the conversion of EGRs into physical gold.

In a new circular, SEBI said the risk management framework has been issued to protect the interests of investment and promote the development of the securities market.

The core of the risk management system is the liquid assets deposited by trading members with the clearing corporation, with requirements for members to deposit margins upfront and to cover mark-to-market losses.

Under the framework, stock exchanges are required to collect liquid assets for VaR margin upfront, without netting of positions across different settlements.

Margin for mark-to-market losses would have to be collected before the start of the next day's trading. An extreme loss margin will also be collected or adjusted against a member's total liquid assets on a real time basis.

Clearing corporations would have the right to impose additional "risk containment measures", or "ad-hoc margins",  to deal with circumstances that were not anticipated when designing the risk management system.

The framework sets out the types of liquid assets that are eligible as margin, as well as applicable haircuts and concentration limits.

Separately, SEBI has decided that investment in commodities, including gold, by mutual fund schemes shall be assigned a risk score corresponding to annualised volatility, which shall be computed quarterly based on 15 years of price data.

Source: Regulation Asia