Market regulator Securities and Exchange Board of India (SEBI) has introduced a risk management framework or risk-o-meter for evaluating the risk level of gold and gold related instruments in which mutual funds are permitted to invest. In a circular, SEBI said that these instruments will be assigned a risk score corresponding to the annualised volatility in the price of electronic gold receipts (EGR) on recognised stock exchanges.
The annualised volatility will be computed every quarter. It will be based on the past 15 years’ prices of the benchmark index of the commodity. The risk score will be categorised in four levels ranging from 'moderate' to 'very high', said the SEBI circular.
How will it be calculated:
If the volatility in these commodities is less than 10%, then the risk will be moderate. Whereas, if there is a fluctuation of 10% to 15%, there will be moderately high risk and if there is the volatility of 15 to 20%, there will be a high-risk category. If it is more than 20%, it will be kept in the very high-risk category.
For example, SEBI said, if the price of gold has annualised volatility of 18% based on the price of gold of the past 15 years, then gold and gold related instruments will have a risk value of 5 (high) on risk-o-meter. In October 2020, the regulator had said investment in gold and gold-related instruments by schemes will be valued at 4 from risk perspective.
This new framework will come into force with immediate effect, the SEBI said.
In October 2020, SEBI had said that investment in gold and gold-related instruments by schemes will be valued at 4 from a risk perspective.
The latest circular which came out last week, forms part of a series of steps, starting with the Gold Exchange and SEBI (Vault Managers) Regulations of September 2021, taken by SEBI to set up spot gold exchanges in India. It comes into effect immediately. Once spot gold exchanges are operationalised, EGRs will be created in exchange for physical gold deposited with a vault manager for trading (like securities) on the EGR segment.
According to the circular, liquid assets deposited by members with the Clearing Corporation must be adequate enough to cover the following requirements - mark-to-market (MTM) losses on outstanding settlement obligations of the member, value at risk (VaR) margins to cover potential losses for 99.9% of the days, extreme loss margins to cover situations outside the coverage of VaR margins and any other margins, as prescribed.
These liquid assets can include cash, bank fixed deposits, bank guarantees with limits on exposure to a single bank directly or indirectly, central government securities and units of liquid funds or government securities, and mutual funds, among others.
The circular has added further details on each of the above-mentioned requirements, among other things. For instance, the stock exchanges shall collect/adjust MTM losses from the member/broker before the start of the trading of the next day. The VaR margin shall be collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. The extreme loss margin shall be minimum of 1% and will be collected/ adjusted against the total liquid assets of the member on a real time basis. The MTM loss and the VaR and extreme loss margins will be collected on the gross open position of the member.
The Clearing Corporations will have the right to impose additional risk containment measures over and above those mandated by SEBI. While doing so, they will have to ensure that such measures like ad-hoc margins are introduced only to deal with circumstances that cannot be or were not anticipated while designing the risk management system.
Also, the Clearing Corporations shall levy a penalty on the trading member/clearing member for short-collection or non-collection of margins.
