**Summary:**
This circular, reference number SEBI/HO/CDMRD/DRMP/CIR/P/2021/08 dated January 11, 2021, issued by the Securities and Exchange Board of India (SEBI), addresses a review of the Volatility Scan Range (VSR) for option contracts within the Commodity Derivatives Segment. It is directed towards Managing Directors and Chief Executive Officers of all Clearing Corporations with Commodity Derivatives Segments.
The circular mandates a minimum VSR value for underlying commodities, categorized by volatility (low, medium, and high) as defined in SEBI circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2020/15 dated January 27, 2020. The minimum VSR values are:
* **Low Volatility:** 4 for Non-Agri commodities, 5 for Agri commodities
* **Medium Volatility:** 5 for Non-Agri commodities, 6 for Agri commodities
* **High Volatility:** 6 for Non-Agri commodities, 7 for Agri commodities
Clearing Corporations (CCs) are required to review the VSR values monthly via backtesting using the last three years of data by the 15th of each month. Volatility extraction should be done using appropriate models, such as EWMA, over the relevant Margin Period of Risk (MPOR). Any changes to the VSR must be implemented from the 1st trading day of the following month.
This circular is effective from April 1, 2021, and is issued under Section 11(1) of the Securities and Exchange Board of India Act, 1992. The circular is available on the SEBI website (www.sebi.gov.in).
For further information, contact Vishal V. Nair, Deputy General Manager, Division of Risk Management, Commodity Derivatives Market Regulation Department, at vishaln@sebi.gov.in.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for the securities market in India.
Volatility Scan Range (VSR): Parameter used for option contracts in the Commodity Derivatives Segment to determine price fluctuations.
Clearing Corporations (CCs): Organizations that provide clearing and settlement services for trades, specifically in the context of options and commodity derivatives.
Commodity Derivatives Segment: A section of the financial market dealing with derivative products related to commodities.
Securities and Exchange Board of India Act, 1992: The governing law that empowers SEBI to regulate the securities market and protect investors.
Option on Futures: A type of derivative contract where the holder has the right, but not the obligation, to buy or sell a futures contract at a specified price on or before a specified date.
Option on Goods: A type of derivative contract where the holder has the right, but not the obligation, to buy or sell a specific quantity of a commodity at a predetermined price on or before a certain date.
EWMA (Exponentially Weighted Moving Average): A type of weighted moving average that applies exponentially decreasing weights to data points over time, used for volatility calculation.
CIRCULAR
SEBI/HO/CDMRD/DRMP/CIR/P/2021/08 January 11, 2021
To
The Managing Directors / Chief Executive Officers
All Clearing Corporations having Commodity Derivatives Segment
Sir / Madam,
Sub: Review of Volatility Scan Range (VSR) for Option contracts in Commodity
Derivatives Segment
1. SEBI vide circular No. SEBI/HO/CDMRD/DMP/CIR/P/2017/55 dated June 13,
2017 regarding ‘Option on Futures’ inter alia advised Exchanges to fix and
determine the volatility scan range (VSR) values as below:
“Exchanges shall fix prudent price scan range, volatility scan range and/or
plausible changes in any other parameters impacting options price. Exchange
shall impose appropriate short option minimum margin, calendar spread charge
and extreme loss margin for option contracts.”
Further, SEBI vide circular No. SEBI/HO/CDMRD/DMP/CIR/P/2020/05 dated
January 16, 2020 on ‘Option on Goods’ advised Clearing Corporations (CCs),
inter alia, to fix prudent VSR.
2. In light of the increased market volatility in the recent past, the adequacy of
current VSR values used by CCs in their margin framework was examined. This
was done in the context of CPSS-IOSCO prescription for margin models which
limits the need for destabilising and pro-cyclical changes.
3. It has, therefore, been decided, in consultation with CCs, to prescribe minimum
VSR values for underlying commodities based on their volatility viz, high, medium
and low as categorised in SEBI circular No. SEBI/HO/CDMRD/
DRMP/CIR/P/2020/15 dated January 27, 2020.
4. The VSR in respect of various categories of commodities shall be subject to
following minimum values:
Volatility Category Minimum VSR % Minimum VSR %
Non Agri commodities Agri Commodities
Low 4 5
Medium 5 6
High 6 7
Page 1 of 25. CCs (providing clearing and settlement for options) shall review the value of VSR
by back testing on a monthly basis using last 3 years’ data by 15th of every month
and any change in VSR shall be implemented from 1st trading day of the
following month.
6. The back testing shall be done by using appropriate models to extract volatility
(such as EWMA (Exponentially Weighted Moving Average) volatility of the
underlying futures contract, implied volatility of options, etc.) over the relevant
MPOR (Margin Period of Risk) period.
7. The circular shall be effective from the first trading day of the month of April 01,
2021.
8. This circular is issued in exercise of the powers conferred under Section 11 (1) of
the Securities and Exchange Board of India Act, 1992, to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
9. This circular is available on SEBI website at www.sebi.gov.in.
Yours faithfully
Vishal V. Nair
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
vishaln@sebi.gov.in
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