The Hindu Business Line : SEBI asks SEs to get ready for new risk mgmt system

TO align and streamline the risk management framework across the cash and derivatives markets, SEBI has asked stock exchanges to implement a new framework by May 18.

Exchanges have also been asked to test the necessary software and remove any glitches in its operation well before May 18 to avoid any problems in the live environment.

"While the comprehensive risk management framework is expected to contain risk in the system, the efficacy of the same will be dependent on monitoring, surveillance and timely collection of margins by the stock exchanges. SEs are advised to strengthen their monitoring and surveillance systems and take such timely actions as and when necessary," said the SEBI circular.

The core of the risk management system is the liquid assets deposited by members with the exchanges and clearing corporation. These assets cover mark to market losses, VaR margins, extreme loss margins and base minimum capital. The SEs should lay down exposure limits either in rupee terms or as percentage of the trade guarantee fund or settlement guarantee fund that can be exposed to a single bank directly or indirectly, according to the new circular. The total exposure would include guarantees provided by the bank for itself or for others as well as debt or equity securities of the bank which have been deposited by members towards total liquid assets.

Mark to market losses should now be paid by the member in the form of cash or cash equivalents. Trading frequency and impact cost should be calculated on the 15th of every month on a rolling basis considering the previous six months, the circular said.

Newly listed securities will be categorised in that group where the market capitalisation of the newly listed stock exceeds or equals the market capitalisation of 80 per cent of the stocks in that particular group. Subsequently, after one month, whenever the next monthly review is carried out, the actual trading frequency and impact cost of the security will be computed, to determine the liquidity categorisation of the security, the circular said.

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