Sebi Introduces New Stress Testing Protocols for Equity Derivatives

Market regulator Sebi has unveiled new stress testing methodologies for the equity derivatives segment. Aimed at boosting risk assessment, these methods include Stressed Value at Risk, Monte Carlo simulations, and filtered historic simulations. Clearing corporations (CCs) will now need to regularly define and review stress periods.

Market regulator Sebi on Tuesday 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), Sebi said in a circular.

Additionally, Sebi's new methods include Stressed Value at Risk (VaR), which leverages volatility from stress periods, and Monte Carlo simulations, which calculate price movements with option volatility shocked by 100 percent.

Filtered historic simulations will adjust past data to reflect current volatility using an Exponentially Weighted Moving Average (EWMA), with a factor model considering the highest 3-day Nifty movements adjusted by the stock's beta.

Clearing corporations are required to define, update, and review stress periods regularly using a 3-day Stress Period of Risk. To meet increased corpus requirements in equity derivatives, excess funds from the equity cash segment can be transferred under specific conditions, maintaining at least 50% of the MRC in each segment.