Framework to Enable Verification of Upfront Collection of Margins from Clients in Commodity Derivatives Segment

In the context of the framework to enable verification of upfront collection of margins from clients in cash and derivatives segments, the Securities and Exchange Board of India (SEBI) issued a circular (SEBI/HO/MRD2/DCAP/CIR/P/2020/127) dated July 20, 2020 and the Indian Clearing Corporation Ltd. (ICCL) issued a circular (20200722-28) dated July 22, 2020.

A notice (20200918-41) dated September 18, 2020 drew the attention of members to the above-mentioned circulars and notified that the below-mentioned procedure will be followed w.r.t. upfront margin in the commodity derivative segment from October 1, 2020.

1. The ICCL is required to send at least 4 snapshots of client-wise margin requirement to Trading Members (TMs) or Clearing Members (CMs), so they can know the intraday margin requirement per client, TM, or Custodial Participant (CP) in each segment.

2. These snapshots are to be taken randomly in pre-defined periods of time. And the last snapshot will be taken at 5PM.

3. The details of the peak margin requirements of clients, TMs and CPs, as based on the intraday snapshots taken, are to be provided to TMs or CMs in the files as mentioned in the annexures (the notice comes with an annexure).

4. The EOD margin files are also to be provided to TMs or CMs as per the details mentioned in the attached annexures.

5. Based on the margin files provided by ICCL, members are required to report the margin collected from each of client, TM, or CP as the case may be at EOD. Members also need to report the peak margin collected during the day.

6. The margins reported by members shall be compared in following manner:

     a) The EOD margin obligation of the client, TM or CP shall be compared with the respective client, TM, or CP margin available with the TM or CM at EOD.

     b) The peak margin obligation of the client, TM, or CP across the snapshots shall be compared with the respective client, TM, CP peak margin available with the TM or  CM during the day.

7. The shortfalls, if any, in (a) and (b) above shall then be compared, and the higher of those two shortfalls will be considered for levying penalty.

8. The peak margin obligation will be adopted in phased manner across 5 phases, as given below.

Phase No.        Effective date of         Percentage of peak margin comparison
                   phase implementation      with the respective client peak margin 
                                                                 available with the TM/CM

Phase 1        October 01, 2020                    Not applicable
Phase 2        December 01, 2020                       25%
Phase 3        March 01, 2021                              50%
Phase 4        June 01. 2021                                75%
Phase 5       September 01, 2021                      100%

9. Any shortfall in the collection of margins (as mentioned in point 6 and 7 above) is to be calculated by taking into consideration the phased adoption of peak margin obligations.

10. Accordingly, during the period of phased adoption, the member should be able to demonstrate that the balance peak margin obligation has been funded from the member’s own funds, and not from any other client.

11. The changes in margin file formats and reporting formats as annexed shall be effective from October 1, 2020.

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