Description

SEBI modifies SGF coverage norms for commodity derivatives, raising the minimum clearing member default threshold from 2 to 3, and introduces a new provision allowing SEBI to grant case-by-case exemptions from SGF enforcement.

Summary

SEBI has amended the Core Settlement Guarantee Fund (SGF) coverage norms for the Commodity Derivatives Segment, effective immediately. The amendment modifies paragraph 22 (Standardized Stress Testing) of Annexure O of the SEBI Master Circular for Commodity Derivatives Segment dated August 4, 2023. The minimum simultaneous clearing member default scenario for stress testing has been raised from 2 to 3 members, and a new discretionary exemption provision (paragraph 23) has been added.

Key Points

  • The SGF coverage standard under Part C of paragraph 22 (Annexure O) is revised: Clearing Corporations must now calculate credit exposure for simultaneous default of at least 3 clearing members (and their associates) causing the highest credit exposure, up from the earlier requirement of at least 2.
  • The previous secondary benchmark — 50% of credit exposure due to simultaneous default of all clearing members — has been removed from the coverage formula.
  • A new paragraph 23 (“Other Provisions”) is inserted in Annexure O, granting SEBI discretionary power to provide case-by-case exemptions or relaxations from strict SGF enforcement in the commodity derivatives segment.
  • The circular was issued based on stakeholder representations, recommendations of the Risk Management Review Committee (RMRC), public comments, and the objective of facilitating Ease of Doing Business.
  • Issued under Section 11(1) of the SEBI Act 1992 read with Regulation 51 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.

Regulatory Changes

Amendment to Part C, Paragraph 22, Annexure O — SGF Coverage:

Previous provision:

  • Credit exposure due to simultaneous default of at least 2 clearing members (and their associates) causing highest credit exposure.
  • 50% of the credit exposure due to simultaneous default of all clearing members.

New provision:

  • Credit exposure due to simultaneous default of at least 3 clearing members (and their associates) causing highest credit exposure.
  • The “50% of all clearing members” clause has been removed.

New Paragraph 23 — Other Provisions (inserted after paragraph 22):

  • SEBI may, after due deliberation, grant exemptions or relaxations from strict SGF provisions on a case-by-case basis.
  • Such exemptions will consider prevailing market conditions, adequacy of applicable risk management framework, and overall investor protection objectives.

Compliance Requirements

  • All Recognised Clearing Corporations having a Commodity Derivatives Segment must update their stress testing methodologies to reflect the new 3-member default threshold.
  • Clearing Corporations should recalibrate their Core SGF sizing based on the revised coverage standard.
  • Internal risk management policies and documentation referencing the old 2-member threshold and the 50% all-member clause must be updated accordingly.
  • No additional reporting requirements are specified; compliance is operational and effective immediately.

Important Dates

  • Circular Date: March 16, 2026
  • Effective Date: Immediate (circular comes into force with immediate effect)
  • Reference Circular: SEBI Master Circular SEBI/HO/MRD/MRD-PoD-1/P/CIR/2023/136 dated August 4, 2023 (the circular being amended)

Impact Assessment

Operational Impact: Clearing Corporations will need to recalculate their Core SGF requirements under the new 3-member stress test scenario. The removal of the “50% of all clearing members” clause simplifies the coverage formula to a single benchmark, potentially reducing the required SGF corpus for some clearing corporations and easing compliance.

Market Impact: Low to moderate. The change is broadly seen as an Ease of Doing Business measure. Raising the threshold from 2 to 3 defaults may marginally reduce required SGF contributions, freeing capital for clearing members. However, the addition of a SEBI discretionary exemption clause introduces regulatory flexibility that could be used in stressed market conditions.

Risk Consideration: The new paragraph 23 provides SEBI with a safety valve to address extreme or unusual market scenarios without requiring formal rule changes, which could support market stability during crises. The net risk impact is considered neutral to marginally positive given the retention of robust stress testing requirements.

Impact Justification

Operational change to SGF coverage norms for commodity derivatives clearing corporations; raises default threshold from 2 to 3 members and adds SEBI discretionary exemption clause, easing compliance burden without systemic risk implications.