• Sebi has introduced circular prescribing Risk Management Framework for Electronic Gold Receipt (EGR)
• latest circular is part of a series of key initiatives taken by Sebi towards establishing spot gold exchanges in India as a part of SEBI (Vault Managers) Regulations, 2021,
• SEBI is focusing on the adequacy of readily available liquid assets for risk coverage

The Securities and Exchange Board of India (Sebi) has come out with circular for introducing risk management framework for the electronic gold receipt (EGR).

Currently, two institutions in the country, the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX), provide gold futures contracts, but there is no specialised platform for gold exchange. Earlier The National Stock Exchange of India (NSE) has announced teaming up with the India Bullion and Jewelers Association Ltd (IBJA) to launch Domestic Bullion Spot Exchange to ensure complete transparency in the bullion transactions executed on its platform. The prospective business framework will cater to business-to-business (B2B) parts of the gold industry and integrate the value chain participants in the bullion ecosystem.

The latest circular is part of a series of key initiatives taken by Sebi towards establishing spot gold exchanges in India, beginning with the Gold Exchange and Sebi (Vault Managers) Regulations of September 2021. EGRs will be generated in exchange for physical gold deposited with a vault manager for trading in EGR, once spot gold exchanges are operationalized.

SEBI is focusing on the adequacy of readily available liquid assets for risk coverage as part of Gold Exchanges risk management strategy. The liquid assets deposited by members with the Clearing Corporation will form the backbone of the risk management system, and available liquid assets must be sufficient to cover all risks arising from Mark to market losses, Value at Risk margins for covering potential losses, Extreme Loss Margins for covering expected losses, and any other needed margins.

Liquid assets valuation will be subject to haircuts depending on their nature. A minimum of 10% haircut will be applied to units of liquid mutual funds or government securities mutual funds, and a minimum of 20% haircut will be applied to Gold ETF/Bullion.

The SEBI has set a limit on exposures. Not more than 1% of total liquid assets deposited with the Stock Exchange shall be exposed to any single bank with a net worth of less than INR 500 crores and failing to fulfil the SEBI rating criterion. Further circular provides for:

• All such banks together shall not be exposed to more than 10% of the total liquid assets lodged with the Stock Exchange.
• At least 50% of liquid assets shall be Cash equivalents
• To reduce concentration risk, stock exchanges must ensure that their collateral is appropriately diversified, as required by SEBI.

Only scenarios that cannot be predicted in advance or that were not foreseen while establishing the risk management system would need the use of margins for computing additional risk management measures. If ad-hoc margins are imposed on a regular basis, Clearing Corporations should consider whether the events that lead to them can be reasonably foreseen and thus incorporated into the SEBI-mandated risk management framework. Clearing Corporations are encouraged to investigate these circumstances and report them to SEBI for further action.

Staff Galactik Views