Regulatory Updates #29: SEBI tightens risk management for commexes, RBI norms on credit supply & more

Bar & Bench will bring to you the latest regulatory and policy updates from different ministries and regulatory authorities. In this edition of the Bar & Bench Regulatory Updates, we analyse the latest updates by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI)..SEBI tightens risk management for commodity exchanges.SEBI has introduced a slew of measures to further strengthen and upgrade the risk management in commodity derivatives market, which are to be implemented by the the exchanges on or before December 1, 2016..The circular comes at a time when futures trading in most of the agriculture commodities are facing the heat due to sharp run up in prices. NCDEX had to suspend trading castor seed and chana due to price manipulation..To curb speculation, SEBI has withdrawn margin benefit on spread positions. Exchanges have been told to estimate appropriate Margin Period of Risk for each product based on liquidity in the product and scale up the initial margins, if required. However, to avoid any additional volatility and default risk, the SEBI has asked exchanges to collect an initial margin covering two days of risk, double what is taken today, and the margin. The delivery period margin requirement has also been increased..Exchanges have been asked to handle members where repeated margin/pay-in shortfalls beyond a threshold amount has been seen and steps have been prescribed for it..Exchanges have been, for the first time in the commodities segment, told to impose adequate concentration margins to cover the longer period risk required for liquidation of concentrated positions in any commodity..In the event the brokers fail to honour margin obligations, the “regaining matched book” rule permits them to opt for voluntary liquidation of positions at a price that is decided by the commodity exchange..The circular also forces repeat offenders to square off their positions. They could also be charged higher initial margins or asked to pay some penalty that could mitigate market risks relating to his trades..SEBI takes measures to improve transparency in spot market price.To improve transparency in spot price discovery at commodity exchanges, regulator SEBI has asked bourses to display on their websites, beginning 29 September 2016, the spot pricing mechanism for every contract..They also need to give details about the contract, mechanism of spot price polling, method for arrival at spot prices, whether these prices include taxes and other levies, whether mechanism outsourced to any external agency and criteria for selection of these polling participants..The information would continue to be displayed even after the expiry of the contract for a period of three years..They have been asked to provide a separate feedback window for receiving complaints in this regard. The exchanges would have to address such complaints in a time-bound manner..RBI issues norms on credit supply large borrowers.The RBI recently released guidelines on ‘enhancing credit supply to large borrowers’ through market mechanism, with the objective of mitigating risk of high exposure of banking system to a single borrower..Not only has the RBI cautioned lenders against borrowers trying to circumvent the cut-off aggregate sanctioned credit limit (ASCL) criteria by borrowing through dummy or fictitious group companies, but it has also asked banks to set aside an additional provision of 3 per cent on incremental exposure of the banking system to large borrowers if they cross the normally permitted lending limit (NPLL)..RBI has also mandated an additional risk weight of 75 per cent over and above the applicable risk weight for the exposure to the specified borrower. The framework will come into effect from the financial year 2017-18..RBI has, however, allowed banks to subscribe to bonds issued by the specified borrowers (over and above NPLL) in 2017-18 provided these are divested in the subsequent three years .