Compliance with Principles for Financial Market Infrastructures

Transcription

1 PFMI Disclosure

2 NCDEX Disclosures on Compliance with Principles for Financial Market Infrastructures Committee of Payments and Market Infrastructures International Organisation of Securities Commission September 2017 NCDEX IOSCO PFMI DISCLOSURE 2

3 Responding institution Jurisdiction(s) in which the FMI operates Authority(ies) regulating, supervising or overseeing the FMI National Commodity and Derivatives Exchange Limited India Securities and Exchange Board of India The date of this disclosure is September 29, 2017 This disclosure is also made available at For further information, please contact National Commodity & Derivatives Exchange Limited, Ackruti Corporate Park, LBS Road, Kanjur Marg (W), Mumbai , India. NCDEX IOSCO PFMI DISCLOSURE 3

4 Contents I. Executive Summary... 6 II. Summary of major changes since the last update of the disclosure... 7 III. General background on the FMI... 8 IV. Principle-by-principle summary narrative disclosure Principle 1: Legal Basis Principle 2: Governance Principle 3: Framework for the comprehensive management of risks Principle 4: Credit Risk Principle 5: Collateral Principle 6: Margin Principle 7: Liquidity Risk Principle 8: Settlement Finality Principle 9: Money settlements Principle 10: Physical deliveries Principle 11: Central securities depositories Principle 12: Exchange-of-value settlement systems Principle 13: Participant-default rules and procedures Principle 14: Segregation and portability Principle 15: General business risk Principle 16: Custody and investment risks Principle 17: Operational Risks Principle 18: Access and participation requirements Principle 19: Tiered participation arrangements Principle 20: FMI links Principle 21: Efficiency and effectiveness Principle 22: Communication procedures and standards Principle 23: Disclosure of rules, key procedures, and market data Principle 24: Disclosure of market data by trade repositories V. List of publicly available resources NCDEX IOSCO PFMI DISCLOSURE 4

5 Glossary CCP CPMI CPSS CSD DNS DvD DvP EWMA FMI IOSCO LVPS NCDEX PFMI SCRA SECC SEBI SGF SSS TR Central Counterparty Committee on Payment & Market Infrastructure Committee on Payment & Settlement Systems Central Securities Depository Deferred net settlement Delivery versus delivery Delivery versus payment Exponentially Weighted Moving Average Financial market infrastructure International Organisation of Securities Commission Large-value payment system National Commodity & Derivatives Exchange Limited Principles for Financial Market Infrastructure Securities Contracts (Regulations) Act Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations Securities and Exchange Board of India Settlement Guarantee Fund Securities settlement system Trade Repository NCDEX IOSCO PFMI DISCLOSURE 5

6 I. Executive Summary This document provides disclosure on the 24 Principles for Financial Market Infrastructure (PFMI) specified by CPMI-IOSCO applicable to Central Counterparties. The PFMIs comprise of 24 principles for Financial Market Infrastructure to provide for effective regulation, supervision and oversight of FMIs. This disclosure is based on the guidelines provided by CPMI-IOSCO and the report titled Principles for financial market infrastructures: Disclosure framework and assessment methodology, published in December, NCDEX is a recognized Commodity Exchange by SEBI and clears and settles trade executed on its platform. SEBI vide a circular no. SEBI/HO/CDMRD/DMP/CIR/P/2016/137 dated December 16, 2016 directed that the Commodity Exchanges shall be required to comply with the PFMIs specified by CPSS- IOSCO as applicable to CCPs until their clearing and settlement functions are transferred to recognised clearing corporations. The legal basis for the activities of NCDEX are articulated in the Securities Contracts (Regulations) Act, 1956 ( SCRA, 1956 ), Securities and Exchange Board of India Act, 1992, Securities Contracts Regulation Rules, 1957 ( SCRR, 1957), and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and Rules, Byelaws and Regulation of NCDEX. The Exchange has implemented a robust risk management framework. NCDEX has formulated its risk management framework based on the Comprehensive Risk Management Framework and other directives and guidelines issued by SEBI. NCDEX IOSCO PFMI DISCLOSURE 6

7 II. Summary of major changes since the last update of the disclosure The version published on September 29, 2017 is the NCDEX s first PFMI disclosure document. NCDEX IOSCO PFMI DISCLOSURE 7

8 III. General background on the FMI General description of NCDEX and markets served National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed multi commodity exchange. NCDEX commenced operations in December The shareholders of NCDEX comprises of large national level institutions, large public sector bank and companies. NCDEX is a national level, technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management. The subsidiaries of NCDEX comprise of NCDEX e Markets Limited (NeML) - the online spot markets and services company, NCDEX Institute of Commodity Research (NICR) the education and outreach arm, NCDEX Clearing Corporation Limited (NCCL) - clearing and settlement services and National E- Repository Ltd. (NERL) the online warehouse receipt repository regulated by WDRA. As of September 29, 2017, the Exchange offered trading in 26 commodity futures contracts, which includes 24 agricultural commodities, 1 bullion and 1 metal. General Organisation The business of the NCDEX is subject to the oversight of its Board of Directors. The Board reviews operations of the NCDEX on a regular basis through various committees constituted under it and as required by the procedural norms. All directors can be appointed only after the approval of SEBI. SECC regulations have laid down the eligibility requirements for Board of Directors. They are required to meet the fit and proper criteria and must not be associated with any trading/clearing member of the Exchange. There are three categories of directors of the clearing corporation viz. Managing Director, Shareholder Directors and Public Interest Directors. The Board has entrusted the responsibility of day-to-day management of business on the Management Team. The Board of Directors and shareholders of NCDEX appoints MD & CEO to manage the Exchange s business and operations and implement board s decisions and policies, along with the management team. Management is responsible for the day-to-day management of the Company. Each member of the Management Team is responsible for the performance of their applicable business function and is NCDEX IOSCO PFMI DISCLOSURE 8

9 ultimately accountable to the MD & CEO. The roles and objectives of the management are set in accordance with the organisational goals and objectives. Legal and Regulatory Framework NCDEX is a public limited company incorporated under the Companies Act, NCDEX is regulated by Securities and Exchange Board of India. NCDEX is subjected to various laws of the land like the Securities Contracts (Regulation) Act, 1956, Companies Act, Stamp Act, Contract Act and various other legislations. The legal basis for the activities of the Exchange are articulated in the Securities Contracts (Regulations) Act, 1956 ( SCRA, 1956 ), Securities and Exchange Board of India Act, 1992, Securities Contracts Regulation Rules, 1957 ( SCRR, 1957), and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, The operations and functioning of the trading of futures contracts on the NCDEX are governed by its Rules, Byelaws and Regulations which are approved by SEBI. System Design and Operations The new trading system - the NextGen system, is among the country s fastest trading systems. It is better suited to offer products such as options and indices, besides handling high frequency/algo trading. It is able to execute regulatory changes more quickly and cost-effectively, which will assist in efficient intra-day closure, pre-order checks and order flow monitoring. The clearing & settlement services are designed to serve the requirements of the markets that is geographically diverse and to certain extent, unique to Indian markets. The delivery of commodities is served by a unique system of warehousing arrangements that cater to the specific requirements and practices of a particular commodity. Further, the system of electronic accounting of commodities are specifically designed to cater to the market s need for efficiency and effectiveness. The trading at NCDEX is conducted from Monday to Friday except for trading holidays as declared by the Exchange. Trading hours of Internationally Referencable Agri Commodities and Non-Agri Commodities is from am to 9.00 pm. Trading hours of all other commodities is from am to 5.00 pm. The Clearing House of the NCDEX undertakes to guarantee the financial settlement of all deals arising out of trades in commodities duly executed on the trading system of the Exchange. NCDEX IOSCO PFMI DISCLOSURE 9

10 Futures contracts are subject to two types of settlements; the daily mark to market settlement, which occurs on a daily basis till expiry and the final settlement, which occurs after the last trading day of the futures contract. NCDEX IOSCO PFMI DISCLOSURE 10

11 IV. Principle-by-principle summary narrative disclosure Principle 1: Legal Basis An FMI should have a well-founded clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions Summary Narrative Key Consideration 1: The legal basis should provide a high degree of certainty for each material aspect of an FMI s activities in all relevant jurisdictions National Commodity and Derivatives Exchange (NCDEX) is recognised as a Stock Exchange by Securities and Exchange Board of India (SEBI) under Securities Contracts (Regulations) Act, 1956 (SCRA, 1956) and operates under the regulatory preview of SEBI. The Exchange has operation only in Indian jurisdiction and does not offer services in any foreign jurisdiction. While the Rules and Byelaws of the Exchange are in the nature of subordinate legislations duly gazette notified under the provisions of Securities Contracts (Regulation) Act, 1956 ( SCRA ), the Regulations of the Exchange are notified in terms of the provisions of the Byelaws. The rights and obligations of the participants with respect to material aspects such as novation, netting, settlement finality, rights and obligation of clearing house in collateral arrangements, settlement guarantee fund, default procedures etc. have been well laid down in the Rules, Byelaws and Regulations of the Exchange. Novation: NCDEX is not a CCP. However the clearing house of the Exchange clears and settles the trades executed on the Exchange platform. The Exchange s clearing house is a CCP to the extent of ensuring financial guarantee. It novates the contract financially. Bye Law 3.8 (Part-B) of the Exchange Bye Laws prescribe norms regarding the novation by financial guarantee and ensuring to take such adequate measures as it deems fit to ensure good delivery. SEBI has given Commodity Exchanges 3 years time period (till September 2018) to set an independent clearing corporation that will perform the functions of a CCP as per SECC guidelines. Settlement Finality: Provisions relating to Settlement Finality and Netting are provided in newly inserted Bye Law 3.1A of Part B of the Exchange Bye Laws which have been submitted to SEBI for approval and Regulation 9 of NCDEX IOSCO PFMI DISCLOSURE 11

12 the Exchange Regulations. Dematerialisation and Payment provisions are also dealt in Regulation 9 of the Exchange Regulations. a) Payment and settlement in respect of a deal shall be final, irrevocable and binding on the Clearing Members b) When a settlement has become final and irrevocable, the right of the Clearing House of the Exchange to appropriate any collaterals or deposits or margins contributed by the clearing member towards its settlement or other obligations in accordance with these Byelaws shall take priority over any other liability of or claim against the said clearing member c) For removal of doubts, it is hereby declared that the settlement, whether gross or net, referred to in Clause (a) above is final and irrevocable as soon as the money, securities or other transactions payable as a result of such settlement is determined, whether or not such money, securities or other transactions is actually paid. d) The payment and settlement in respect of a deal shall be determined in accordance with the netting or gross procedure as specified by the relevant authority with the prior approval of SEBI through the circulars issued by the Clearing House of the Exchange from time to time. Netting: The payment and settlement in respect of a deal shall be determined in accordance with the netting or gross procedure as specified by the relevant authority with the prior approval of SEBI through the circulars issued by the Clearing House of the Exchange from time to time. Client funds obligations are netted and grossed at the clearing member level. There is no netting on the physical delivery of commodities. Default Procedures: Provisions relating to default by a Trading Member are provided in Chapter 10 of Part A of the Bye Laws, of Clearing Member in Chapter 7 of Part B of the Bye Laws and Regulation 11.7 and 11.8 and penalties in case of default in Regulation 9.5 of the Exchange Regulations. Key Consideration 2: An FMI should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations The Rules, Byelaws and Regulations are pre-approved by the regulator and notified in the official Gazette. Any further clarity if required to be brought from time to time are made by way of amendments to these Rules, Byelaws and Regulations either by the NCDEX on its own (with prior approval of the SEBI) or on directives from the SEBI. Further, the Exchange issues circulars, contract specification, product note, FAQ s etc. where ever applicable from time to time which are available on the Exchange s NCDEX IOSCO PFMI DISCLOSURE 12

13 website. All these have relevant references to ensure that the directives, process and procedures are clear understandable and consistent with the relevant laws and regulations. Key Consideration 3: An FMI should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants customers, in a clear and understandable way. The legal basis for the activities of the Exchange are articulated in the Securities Contracts (Regulations) Act, 1956 ( SCRA, 1956 ), Securities and Exchange Board of India Act, 1992, Securities Contracts Regulation Rules, 1957 ( SCRR, 1957), and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, The Exchange having received recognition as a Stock Exchange by SEBI is enabled to frame Rules, Byelaws and Regulations which are in the nature of subordinate legislation with due approval from SEBI. The Byelaws, Rules and Regulations as well the circulars issued by the Exchange is available on the website of the Exchange. Key Consideration 4: An FMI should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the FMI under such rules and procedures will not be voided, reversed, or subject to stays NCDEX operates in Indian jurisdiction and its activities are governed by Indian laws, specifically Securities Contracts (Regulation) Act, 1956 and Securities Contracts Regulation Rules, 1957 ( SCRR, 1957). Since the Rules and Byelaws of the Exchange are themselves are in the nature of subordinate legislation, unless the Regulator issues a directive otherwise, are not subject to any impediments. There have been no incident when the actions taken by the Exchange under the Byelaws, Rules and Regulations of the Exchange has been voided, reversed or stayed by any court. Key Consideration 5: An FMI conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions. NCDEX does not operate in multiple jurisdictions and therefore the key consideration is not applicable. However, the potential conflict of laws that could arise is on the point of applicability of State Laws and Central Laws over the point of jurisdiction. In general in the event of such conflicts, the Central Laws prevails. NCDEX IOSCO PFMI DISCLOSURE 13

14 Principle 2: Governance An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders. Summary Narrative Key Consideration 1: An FMI should have objectives that place a high priority on the safety and efficiency of the FMI and explicitly support financial stability and other relevant public interest considerations. The Exchange has clearly identified all the main objectives and objectives incidental or ancillary to the attainment of the main objectives and documented in the Memorandum of Association. The main objectives of NCDEX are: To facilitate, promote, assist, regulate and manage in the public interest, dealings in commodities of all kinds and to provide specialized, advanced, automated and modern facilities for nation-wide trading in commodities and in all types of contracts for buying and selling of commodities, including its derivatives such as Futures, Options and other kinds of derivatives, permitted and to be permitted in future, clearing and settlement thereof with, high standard of integrity and honesty and to ensure trading in a transparent, fair and open manner with access to all players in the commodity markets including foreign funds, corporates and banks engaged in financing commodity transactions from areas in or outside India; To initiate, facilitate and undertake all such activities in relation to Exchange dealing in commodities and its derivatives, as are required for reliable nationwide platform to hedge commodity and price related risks for cross-section of players in the various commodities including producers, manufacturers, traders, exporters and importers; to offer hedging and other related requirements to the community at large; to provide novel and innovative safety mechanisms, to the market participants in such commodities; and to support, develop, promote and maintain a healthy market in the best interest of the all players, market participants and the general public and the economy and to introduce high standards of professionalism among themselves and the commodity(ies) market in general. The rules, regulations and bye-laws framed to govern the business and operations provides the highest priority to safety and efficiency. NCDEX IOSCO PFMI DISCLOSURE 14

15 Further governing Board of NCDEX has Public Interest Directors appointed with prior approval of SEBI. The Board monitors the business of the Exchange, regulatory developments and checks and balances in place for safe and efficient markets. Financial stability is achieved by ensuring maintenance of adequate financial resources including settlement guarantee fund and adherence to the comprehensive risk management framework. Key Consideration 2: An FMI should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, relevant authorities, participants, and, at a more general level, the public. Procedural Norms by SEBI The Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (SECC) Regulations, 2012 and the Procedural norms on Recognitions, Ownership and Governance for Stock Exchanges and Clearing Corporations ( Procedural Norms ) issued by SEBI prescribe in detail the governance norms to be followed by Stock Exchanges and Clearing Corporations Ownership NCDEX is a public limited company incorporated under the Companies Act, The shareholders of NCDEX comprises of large national level institutions, large public sector bank and companies. Necessary provisions in this regard are contained in Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (SECC) Regulations, Governance The business of the NCDEX is subject to the oversight of its Board of Directors. The Board reviews operations of the NCDEX on a regular basis through various committees constituted under it and as required by the procedural norms. All directors can be appointed only after the approval of SEBI. SECC regulations have laid down the eligibility requirements for board of directors. They are required to meet the fit and proper criteria and must not be associated with any trading/clearing member. There are three categories of directors of the Exchange viz. Managing Director, Shareholder Directors and Public Interest Directors. The Board of Directors and shareholders of the NCDEX appoints MD & CEO to manage day to day business and operations and implement board s decisions and policies, along with the management team-.as per the approved delegation of power. In general, the Byelaws provides for the relevant authority i.e. the MD & CEO to take all administrative decision for the functioning of the Exchange. NCDEX IOSCO PFMI DISCLOSURE 15

16 Disclosure NCDEX provides accountability to its owners, participants and other stakeholders through Rules, Regulations, Byelaws, circulars, norms, member agreements, financial statements etc. NCDEX discloses all the governance arrangements (Rules, Regulations, Byelaws, Annual reports etc) on the website. Key Consideration 3: The roles and responsibilities of an FMI s Board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The Board should review both its overall performance and the performance of its individual Board members regularly. The roles and responsibilities of the NCDEX Board of directors are clearly defined in its Articles of Association and Rules. SECC Regulations also provide guidance on role and responsibility of each category of Directors of a Stock Exchange. The Board of Stock Exchange comprises of Shareholder Directors, Public Interest Directors and Managing Director. The Managing Director s performance is assessed by the Board and shareholders. Pursuant to Companies Act, the evaluation of the individual directors, Board as a whole and its Committees is carried out on the basis on certain pre-defined parameters. NCDEX obtains feedback on those pre-defined parameters which is placed before the Nomination and Remuneration Committee and Board on an annual basis. Regulation 26 of SECC Regulations provides for code of conduct for directors and key management personnel of the- Exchange clearing corporations. Every director of NCDEX has to abide by the Code of Conduct specified under Part A of Schedule II of these regulations. Every director and key management personnel of NCDEX have to abide by the Code of Ethics specified under Part B of Schedule II of these regulations. The directors must not be associated with any trading/clearing member and are not allowed to trade on the Exchange. SEBI for any failure by the directors to abide by these regulations or the Code of Conduct or Code of Ethics or in case of any conflict of interest, either upon a reference from NCDEX or suo motu, shall take appropriate action including removal or termination of the appointment of any director. Key Consideration 4: The Board should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive Board member(s). SECC Regulation provides that the board should comprise of: Public Interest Directors; NCDEX IOSCO PFMI DISCLOSURE 16

17 Shareholder Directors; and Managing Director All the Directors are appointed with prior approval from SEBI. The procedural norms have prescribed that the Public Interest Director be selected from diverse field of work. While deciding to propose a person as Public Interest Director, NCDEX take into account the qualification in the area of law, finance, accounting, economics, management, administration or any other area relevant to the financial markets. Every director and key management personnel of a recognized stock exchange shall be a fit and proper person as per SECC Regulations, As required by SECC Regulations, 2012, NCDEX does not provide any incentives to the Board members other than the sitting fees. The Managing Director does not get any sitting fees. The information regarding shareholder directors and public interest directors on NCDEX Board is publicly available on NCDEX website. Key Consideration 5: The roles and responsibilities of management should be clearly specified. An FMI s management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the FMI. Management is responsible for the day-to-day management of the Company. Each member of the Management Team is responsible for the performance of their applicable business area and is ultimately accountable to MD & CEO. The roles objectives of the management are set in accordance with the organisational goals and objectives. Half yearly and annual review and assessment is done to evaluate achievement of the objectives. Besides this for key initiatives, there are more frequent reviews. The selection of the management team is done keeping in view the relevant skill as per the functional area. The Management team as a whole possess diverse and relevant experience in operations, clearing and settlement, finance, technology, compliance, risk management etc. All employees are bound by the code of conduct for employees of the Exchange. Key Consideration 6: The Board should establish a clear, documented risk-management framework that includes the FMI s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the riskmanagement and internal control functions have sufficient authority, independence, resources, and access to the Board. NCDEX IOSCO PFMI DISCLOSURE 17

18 NCDEX has adopted and developed upon the risk management framework as prescribed by SEBI. The framework consists of Capital Adequacy norms, Margining Methodology, Position limits, Default handling mechanism, Settlement Guarantee Fund, Business Continuity Plan. The Risk Management Committee (RMC) of the Board is responsible for overall risk management of the Exchange and scrutinizes and approves risk related policies presented to it by the management. It also directs the management to undertake analysis, frame policies and act where it deems necessary. An Internal Risk Committee has been formed based on delegation of powers from the RMC to look into routine risk issues. Delegation of Authority has been given to MD & CEO, Chief Regulatory Officer and Chief Strategy and Risk to approve new policies in the interim which needs to be subsequently put up to Risk Management Committee for ratification. The Exchange has appointed an independent auditor for Process (Operational) Audit and Internal (Financial) Audit of the Exchange. The auditors report to the Audit Committee of the Board. Key Consideration 7: The Board should ensure that the FMI s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public. There is continuous dialogue with all stakeholders to take into account their point of view. There are regular member meets for instance. The Warehouse Service Provider s (WSP) feedback is taken into account in meetings with them. Separate teams interact with end-users as well to bring in their perspectives and their requirements. These requirements are discussed and necessary actions taken as deemed appropriate. NCDEX engages in informal discussions with members / clients and affected participants at an early stage in the development of any proposal to understand the concerns, including compliance concerns, which they may have in relation to a proposal. In case of products, appropriate product advisory committees have been formed and there exists a structure to take feedback on the proposed contract specifications. Further once a product is launched, regular member and client feedback is taken for any improvements/ amendments, if any, and corrective actions initiated. The Exchange also have participation of stakeholders in committees such as Settlement Guarantee Fund Committee and Product Advisory Committee. NCDEX IOSCO PFMI DISCLOSURE 18

19 Principle 3: Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks. Summary Narrative Key Consideration 1: An FMI should have risk-management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the FMI. Riskmanagement frameworks should be subject to periodic review. The key risks as faced by the Exchange are enumerated below: 1. Credit Risk 2. Liquidity Risk 3. Settlement Risk 4. Operational Risk 5. Market Risk 6. Legal Risk 7. Warehousing Risk 8. Reputational Risk 9. Regulatory and Compliance Risk 10. Competition/ Business Risk The Exchange has implemented a robust risk management framework. Details of policies and processes for management of the risks are provided in the respective principles below. NCDEX has formulated its risk management framework based on the Comprehensive Risk Management Framework and other directives and guidelines issued by SEBI. The Risk Management Committee of the board oversees and monitors the risk management of NCDEX and implementation of the risk related policies. The risk management policies of NCDEX are approved by the Risk Management Committee and reviewed and tested regularly for assessing effectiveness. Internal Risk Committee of NCDEX which has delegation from the Risk Management Committee regularly reviews and monitor risk management at NCDEX. NCDEX has systems and applications for risk monitoring and management. Risk is managed through measures like eligibility criteria and capital adequacy of members, margin requirements, positions limits NCDEX IOSCO PFMI DISCLOSURE 19

20 for member an clients, online monitoring and alerts for increase in risk exposures and limit breaches, norms and guidelines for warehouse service providers etc. Key Consideration 2: An FMI should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMI. NCDEX s rules and regulations clearly explain the requirements and responsibilities of the participants and their customers while trading on the Exchange. The Exchange provides the members with a full view of the risk profile with respect their proprietary as well as client trading including regular information on margins, MTM values, position, collateral etc. for managing their risks. Member compliance to risk management measures is assessed on a regular basis and the Exchange has put in place disincentives like suspension, penalties, position limits, closing-out of positions etc. to discourage non-compliance to requirements resulting in risk to the Exchange. The members are required to collect and report the margin collected from their clients to the Exchange and penalty is levied on the member for short collection of margin. Further, the Exchange provides incentives to the Clearing Members for containing risk to the Exchange e.g. margin exemption for early pay-in of funds and commodities. Key Consideration 3: An FMI should regularly review the material risks it bears from and poses to other entities (such as other FMIs, settlement banks, liquidity providers, and service providers) as a result of interdependencies and develop appropriate risk-management tools to address these risks. The Exchange bears material risks from clearing and settlement banks, custodians, issuers of collateral, liquidity providers and warehouse service providers. Bank exposure policy prescribes stringent criteria for empanelment of clearing and settlement banks and exposure limit is allocated based on their financial strength and other criteria as laid in the policy. Limits are daily monitored and corrective action is taken in case limits are violated. The custodians are regulated by SEBI and the Exchange has an SLA with them. NCDEX has laid down strict norms and guidelines for the empanelment of the warehouse service providers based on the norms issued by SEBI. These norms and guidelines mitigates operational, regulatory and reputation risks arising out of the services of the warehouse service provider. NCDEX IOSCO PFMI DISCLOSURE 20

21 Key Consideration 4: An FMI should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. An FMI should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, an FMI should also provide relevant authorities with the information needed for purposes of resolution planning. NCDEX has put in place a business continuity plan (BCP) and disaster recovery systems to ensure fast recovery and resumption of operations. NCDEX has put in place a default handling policy. Further SEBI has issued guidelines for regaining a matched book in case of default. NCDEX has created a Settlement Guarantee Fund (SGF) which can be used as per the default waterfall in case of settlement default. The Exchange has created a Settlement Guarantee Fund (SGF) which can be used as per the default waterfall in case of settlement default. Further, the Exchange is sufficiently capitalized and holds capital far above the regulatory requirement. The equity capital including reserves is Rs. 454 Crore and the expenses (excluding depreciation) in FY 2017 were Rs. 117 crore. The winding up procedure is clearly defined in clause 213 of its Articles of association. This procedure is in accordance with the Companies Act, 1956, the principle Act for companies. NCDEX Board will formulate and approve the plan to raise additional equity capital on a need basis. The Exchange submits net worth, annual report and other details as required by SEBI from time to time. NCDEX IOSCO PFMI DISCLOSURE 21

22 Principle 4: Credit Risk An FMI should effectively measure, monitor, and manage its credit exposure to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two largest participants and their affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions. All other CCPs should maintain, at a minimum, total financial resources sufficient to cover the default of the one participant and its affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions. Summary Narrative Key Consideration 1: An FMI should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes. Credit exposure may arise from current exposures, potential future exposures, or both. NCDEX s framework to manage credit exposures to its participants broadly consists of: Regulations, rules and policies; Tools to identify measure, monitor and reduce the credit risk exposures; A governance structure dedicated to handle the daily operations; and Escalation tools and default procedures. Mechanism of credit risk framework is as follows: KYC and net worth criteria admission of Clearing members Deposit requirement Minimum Base Capital, Base Capital and Additional Base Capital Life-cycle based Margins Approved collateral with haircuts Concentration limits on collateral Daily MTM settlement Position Limits Exposure limits based on deposit Daily Price Limits Alerts and Triggers for monitoring of exposure NCDEX IOSCO PFMI DISCLOSURE 22

23 Trade restriction mechanism square off/ disablement of members Margin utilization control through Risk Reduction Mode Default procedures and Settlement Guarantee Funds (SGF) The Exchange conducts back testing of the margin to ensure sufficiency of margin and avoid direct credit risk to its participants. The potential future exposure are mitigated by collection of initial margin and the current credit exposure are covered by daily Mark to Market settlement. Key Consideration 2: An FMI should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk-management tools to control these risks. The key sources of credit risk are Clearing Members, Clearing Banks, Collaterals and Investments. 1. Clearing members: For details on monitoring and measurement of credit risk from clearing members, please refer Key Consideration 1 above. 2. Clearing banks Exposures to clearing banks are monitored on a daily basis. 3. Collateral: The credit risk from non-cash collateral is managed by specifying an overall market wide and member specific limit of acceptable value of the collateral. 4. Investments: The credit risk from investments is managed based on by diversifying the investments in various schemes with good investment ratings based on criteria specified in Investment policy approved by the Board. Key Consideration 3: A payment system or SSS should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (see Principle 5 on collateral). In the case of a DNS payment system or DNS SSS in which there is no settlement guarantee but where its participants face credit exposures arising from its payment, clearing, and settlement processes, such an FMI should maintain, at a minimum, sufficient NCDEX IOSCO PFMI DISCLOSURE 23

24 resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system. The key consideration is not applicable to NCDEX as it is neither a Payment System nor a SSS. Key Consideration 4: A CCP should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources (see Principle 5 on collateral and Principle 6 on margin). In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. In all cases, a CCP should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount of total financial resources it maintains. NCDEX does not operate in multiple jurisdictions. NCDEX follows a practice of regular marking to market of positions and settling the same on a daily basis through payment of funds. NCDEX has adopted margining framework prescribed by SEBI. NCDEX charges VaR based initial margin to cover potential losses with atleast 99% confidence over a margin period of risk horizon. NCDEX imposes initial margins sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. SEBI has fixed the minimum Margin period of risk (MPOR) of 2 days. Further, NCDEX sets the MPOR for specific commodities based on the liquidity estimation. NCDEX charges minimum Extreme loss margin (ELM) of at least 1% to cover risks outside the coverage of VaR. NCDEX also charges additional and special margins where necessary. Further margins are grossed at member level to ensure there is no excessive leverage and availability of risk cover. NCDEX also undertakes review and backtesting of margins to measure the robustness of its risk management framework. As prescribed by SEBI, NCDEX maintains a Settlement Guarantee Fund (SGF) to meet potential default, if any, based on stress testing. The SGF corpus as on June 30, 2017 was Rs crore. In addition to the SGF, NCDEX has arrangement for drawing liquidity in the form of undrawn lines of credit from highly reputed bank. NCDEX IOSCO PFMI DISCLOSURE 24

25 Key Consideration 5: A CCP should determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing. A CCP should have clear procedures to report the results of its stress tests to appropriate decision makers at the CCP and to use these results to evaluate the adequacy of and adjust its total financial resources. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a CCP should perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP s required level of default protection in light of current and evolving market conditions. A CCP should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a CCP s participant s increases significantly. A full validation of a CCP s risk-management model should be performed at least annually. The Exchange maintains the Settlement Guarantee Fund (SGF) as per the guidelines of SEBI. The sufficiency of financial resources are determined through stress-test procedure as prescribed for SGF by SEBI. The results are communicated to the regulator, to decision makers within the Exchange and a disclosure of SGF corpus is made on the website. The Exchange s risk-management model is based on risk management framework as prescribed by SEBI and the validation of the model is carried out on an ongoing basis. Key Consideration 6: In conducting stress testing, a CCP should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. NCDEX conducts stress tests as per the framework on SGF prescribed by SEBI. Key Consideration 7: An FMI should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the FMI. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds an FMI may borrow from liquidity NCDEX IOSCO PFMI DISCLOSURE 25

26 providers. These rules and procedures should also indicate the FMI s process to replenish any financial resources that the FMI may employ during a stress event, so that the FMI can continue to operate in a safe and sound manner. The rules and procedures that address credit losses as a result of default have been specified in bye laws of NCDEX as per the default waterfall as prescribed by SEBI. NCDEX IOSCO PFMI DISCLOSURE 26

27 Principle 5: Collateral An FMI that requires collateral to manage its or its participants credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits. Summary Narrative Key Consideration 1: An FMI should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks. NCDEX accepts collaterals which are which are permitted under SEBI guidelines. NCDEX accepts cash, fixed deposits receipts (FDR), bank guarantees (BG), equity shares, select agricultural commodities, Bullion (Gold and Silver), Gold ETF and Steel as collateral. The basic criteria used for determination/ acceptance of collateral by NCDEX are liquidity, low volatility and relative safety of the collateral. Cash and cash equivalent assets must be at least 50% of the total collateral. BG and FDR issued by approved banks are only accepted and there are bank-level limits in place. Total equity and commodity as collaterals at the Exchange level have limits specified. Member level limits for commodities have been specified. Limits for equity shares and mutual fund at issuer and AMC level respectively have been specified. Conservative haircuts are applied on all types of securities accepted as collateral. Key Consideration 2: An FMI should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions. SEBI has prescribed minimum haircuts that should be applied for valuation of collaterals. NCDEX applies haircuts higher of SEBI prescribed guidelines or the Exchange s criteria. SEBI has prescribed haircuts on equity securities based on VaR margins. The Exchange currently applies the haircut for equity securities at 15% and 40% depending of the category of securities or VaR based whichever is higher. Mutual funds are applied a haircut of 40% or VaR based whichever is higher. NCDEX IOSCO PFMI DISCLOSURE 27

28 In case of agricultural commodities, the haircut is 40% and 50% depending on the type of the commodity. 20% haircut is applied to bullions and gold ETF and 60% haircut to steel. Haircuts have largely been set in line with considerations of stressed market conditions and are reviewed regularly. Key Consideration 3: In order to reduce the need for procyclical adjustments, an FMI should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent. The procedures and risk management standards are designed to establish stable collateral haircuts that are typically above current volatility levels associated with collateral prices. Collateral haircuts are set to provide coverage through a broad range of market environments and to remain stable. NCDEX caps the overall exposure to market risks by having necessary limits on non-cash collateral at any given point of time. Key Consideration 4: An FMI should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects. NCDEX has put in place prudent norms to avoid concentrated holdings of certain assets: Cash and cash equivalent assets must be at least 50% of the total collateral. Limit on commodity as Collateral (agricultural and Steel) is to a maximum of Rs.7.50 crores (after haircut) per member. Also, a maximum value of Rs.75 Crores (after haircut including select agricultural commodities and Steel Long) of Agricultural Commodity is presently permitted to be accepted as Collateral across all members of the Exchange. Security of an issuer is restricted to Rs.35 crore at the Exchange Level. The Mutual funds from an AMC is restricted to Rs.10 crore. NCDEX IOSCO PFMI DISCLOSURE 28

29 Further the total Security, Commodity and Mutual Fund is restricted to 15% of overall effective deposits at Exchange Level. Collaterals issued by banks (BG and FDR), are covered by bank exposure policy. Banks issuing collaterals have been allocated exposure limit based on their financial strength and other criteria as per the policy. Key Consideration 5: An FMI that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner. NCDEX does not accept any cross-border collaterals, therefore this key consideration is not applicable. Key Consideration 6: An FMI should use a collateral management system that is well-designed and operationally flexible. NCDEX has robust Collateral Management System. The system is automated & customized to manage this specific nature of business. The System is designed for real time recording and monitoring of collaterals. The posting of equities and commodities as collateral is an automated facility. The system facilitates auto withdrawal of collaterals upon maturity and generates various MIS reports as necessary. The system incorporates various fundamental checks and balances to restrict operational errors, such as those relating to validity of issuer, minimum prescribed duration. The system has the capability to accommodate a wide range of parameters such as issuers, haircuts. The system is customizable and is also capable of accommodating new collateral types. NCDEX IOSCO PFMI DISCLOSURE 29