Review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF)

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....rmining the credit exposure of Clearing Corporations (CCs) towards its participants. 2. In this regard, SEBI has specified the stress testing methodologies to be adopted for determining the credit risk of a CC towards its participants. The current stress testing methodologies are grouped into hypothetical and historical scenarios.  3. For the equity derivatives segment, the stress testing methodologies prescribed by SEBI for determining loss on close-out of client/proprietary positions, under hypothetical and historical stress scenarios, comprising of price movement in respect of each underlying, are tabulated below: Table-1 Scenario Direction Movement 1a Up PSR + 1.5^1 x sigma (λ=0.995) x √2 ....

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.... captures the prevailing volatility.  4.2.2. Historical returns are divided by contemporaneous estimated volatility and then multiplied by latest estimate of volatility.  4.2.3. For this purpose, volatility is calculated as Exponentially Weighted Moving Average (EWMA) with λ = 0.94. 4.3. Factor Model 4.3.1. Highest 3-day, close to close, movement of NIFTY, upwards and downwards, is to be considered based on historical data since 2000.  4.3.2. The said highest upwards and downwards movement of NIFTY are multiplied by the beta (β) of the stock from a stress period to arrive at a figure representing price movement for each underlying.  4.3.3. For revaluing options, the volatility would be shock....

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....may be attributed to the Parent Exchange, in the remaining Core SGF of ECM, from which the money is being transferred. The amount remaining in ECM segment beyond the limits stated above, will be the excess money, available for transfer, for the respective Market Infrastructure Institution (MII). 6.1.3. This excess amount can be transferred from ECM segment to EDX segment and can be allocated to the contributions under the head of respective MIIs only. 6.1.4. In addition, since contribution requirements to ECM are irrespective of penalties, all CCs shall be permitted a one-time transfer of penalties and the interest accrued thereon in ECM to EDX segment. It will be transferred under Penalty head in the EDX segment. Illustration T....

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....esting methodologies stated at para (4) above, shall be brought in by the contributors, within 4 months from the month of issue of this circular (i.e. on or before February 01, 2025).  7.4. The initial additional contribution so required shall be based on highest average stress loss, as per all the stress testing methodologies, witnessed since the month of January 2024 till the preceding month of the issuance of this circular. 7.5. Additionally, for the purpose of one-time inter-segment transfer and for the purposes of making additional contributions to the Core SGF of equity derivatives segment, the penalties credited to the Core SGF and the interest accrued on such penalties, as on last day of month of issuance of this circular....

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....ring clearing and settlement services in the equity derivatives, segment will be segregated into 2 categories: 9.2.1. Category A - CC having equal to or more than 40% of the share of clearing volumes in equity derivatives segment.  9.2.2. Category B -  CC having less than 40% of the share of clearing volumes in equity derivatives segment. 9.3. For the purpose of above categorization, the clearing volumes shall be based on daily average value (in Rs. crores) of contracts cleared by the CCs in the equity derivatives segment for each financial year. Sum of futures turnover and notional options turnover will be considered for this purpose. 9.3.1. CCs offering clearing and settlement services in the equity derivatives segme....

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....the following aspects of the said circular and get it approved by their respective Risk Committees: 11.1.1. Specifying the initial stress period(s) 11.1.2. Specifying operational aspects and detailed implementation mechanism of the new stress testing models. 11.1.3. Specifying the framework for updation and revision of stress periods. 11.1.4. Specifying the methodologies to be adopted for calculating stress losses for stocks where data is not available for the chosen stress period(s) 11.1.5. Specifying the framework for making staggered contributions to the Core SGF. 11.1.6. Any other operational aspect of this circular. 11.2. Take necessary steps to put in place systems for implementation of the circular, including nec....