SEBI introduced new stress testing methodologies for the equity derivatives segment to better account for the changing market dynamics and assess risks.
The new methodologies aim to enhance the determination of the Minimum Required Corpus (MRC) for the Core Settlement Guarantee Fund (Core SGF).
Under the new stress testing methods: More robust methods are added to address the changing market dynamics.
The new methods include Stressed Value at Risk (VaR), which uses volatility from stress periods and Monte Carlo simulations to calculate price movements, with option volatility shocked by 100 per cent.
Additionally, a filtered historical simulation adjusts past data to reflect current volatility using an Exponentially Weighted Moving Average (EWMA), and a factor model considers the highest 3-day Nifty movements adjusted by the stock’s beta.
The regulator has asked clearing corporations to define, update, and review stress periods regularly, using a 3-day Stress Period of Risk.
To meet the increased corpus requirements for equity derivatives,the clearing corporations can transfer excess funds from the equity cash segment (ECM) to the equity derivatives segment (EDX).
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