Review of Margin Framework for Commodity Derivatives Segment

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....r Financial Market Infrastructure (PFMI) inter alia prescribes under Key Considerations for Principle 6 on margin that margining model should to the extent practicable and prudent, limit the need for destabilising, pro-cyclical changes. 3. It is further explained under Clause 3.6.10 of PFMI that: Limiting procyclicality: A CCP should appropriately address pro-cyclicality in its margin arrangements. In this context, pro-cyclicality typically refers to changes in risk management practices that are positively correlated with market, business, or credit cycle fluctuations and that may cause or exacerbate financial instability. For example, in a period of rising price volatility or credit risk of participants, a CCP may require additional ini....

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....given below: - Volatility Category of Commodity Realized Annualized Volatility criteria Low 0 to 15% Medium Above 15 % to 20% High Above 20% b. Realized volatility shall be calculated from series of daily log normal return of main near month future contracts of the respective commodity. The series of daily log normal return shall be rolled over to next month contract on start of staggered delivery period if it is applicable. If staggered delivery is not applicable, then rollover shall be done on the day after the expiry of near month contract. c. Exchange having maximum average daily turnover across all derivative contracts on the respective commodity based on last six months' period shall be termed as Lead Exchange. The....

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....ve reviews. 6. Lean Period in Agri Commodities: a. In case of Agri commodities, it has been observed that during lean period (i.e. the period before the arrival of new crop) there is often uncertainty about the arrivals of new crop. This may lead to higher volatility in prices of commodities during this period. Therefore, CCs shall levy additional lean period margin of 2% on contracts expiring during lean period. b. Lead exchanges shall determine the lean period in consultation with their relevant Product Advisory Committee and disclose the same on their websites. 7. It is reiterated that risk management is primarily a responsibility of CCs and the framework prescribed by SEBI is minimum framework. CCs are allowed to be more conservat....