SEBI/HO/MRD/MRD - PoD - 2/P/CIR/2024/131 — THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

CIRCULAR SEBI/HO/MRD/MRD - PoD - 2/P/CIR/2024/131 October 01, 2024 To All Recognized Stock Exchanges All Recognized Clearing Corporations Sir/Madam, Subject: Review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF) Background SEBI vide Chapter 3 Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 dated October 16, 2023, has, inter-alia , laid down guidelines for determining the credit exposure of Clearing Corporations (CCs) towards its participants. 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. 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 1. Multiple of 1.5 for indices and 1.75 used stocks Adoption of new stress testing methodologies Taking into account the changing market dynamics of the equity derivatives segment, with a view to have a more comprehensive understanding of the prevalent tail risk in the equity derivatives segment, SEBI, after consultation with relevant market participants in its Risk Management Review Committee, has decided to introduce the following additional hypothetical stress testing scenarios/methodologies for determining the Minimum Required Corpus (MRC) of Core SGF in the equity derivatives segment: 4.1. Stressed VaR 4.1.1. Uses the variance -covariance matrix from a stress period to determine the price movements of the u