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Clearing corporations (CCs) have to conduct stress tests for credit risks on a daily basis for each segment — equities, equity derivatives and currency derivatives, said SEBI on Wednesday.
The securities market regulator mandated that CCs have to continuously measure, monitor and manage its credit exposures (money payable or receivable) to its participants and those arising from its payment, clearing, and settlement processes.
CCs have to develop a variety of plausible extreme market conditions to carry out stress testing. This means incorporating scenarios that include peak historic price volatilities, shifts in price determinants and yield curves, multiple defaults over various time horizons, and a spectrum of forward looking stressful and extreme market conditions.
Capturing risk These norms intend to capture the risk due to possible default in institutional trades, harmonise default waterfalls across CCs, limit the liability of non-defaulting members and ring-fence each segment of a CC from defaults in other segments.
Based on these, CCs have to increase the corpus of the core settlement guarantee fund (SGF)/reserves.
CCs also have to maintain sufficient liquid cash and credit lines from banks to manage liquidity risks from its settlements banks, members and investments.
This should be adequate to meet simultaneous default of a minimum of two clearing members and their associates that would generate the largest aggregate liquidity obligation, said SEBI.
Reverse stress test CCs also have to do reverse stress tests — scenarios where all its financial resources would not be enough to meet its commitments to pay.
CCs also have to do back testing using historical data to see whether the margins they collect from members are adequate vis-à-vis the actual price changes for the contracts being cleared and settled. They have to assay the uncovered loss estimated by the various stress tests and beef up in case of any shortfall.
Results of stress testing would be monitored by the risk management committee of the concerned CC and reviewed by its board of directors.
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