SEBI has provided for review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF)

SEBI vide circular dated October 01, 2024 has provided for review of Stress Testing Framework for Equity Derivatives segment for determining the corpus of Core Settlement Guarantee Fund (Core SGF). SEBI, after consultation with relevant market participants in its Risk Management Review Committee, has decided to introduce the following additional hypothetical stress testing scenarios/methodologies for determining the Minimum Required Corpus(MRC)of Core SGF in the equity derivatives segment:

Stressed VaR

1. Uses the variance-covariance matrix from a stress period to determine the price movements of the underlying.
2. Volatility observed during the stress period is to multiplied by a factor of 2.
3. Monte carlo simulations are carried out assuming multivariate normality of daily returns.
4. The resultant figure gives the price movement for each underlying.
5. For revaluing options, the volatility would be shocked by 100% for each underlying.

Filtered Historic Simulation

1. Adjust past data in a way so that it captures the prevailing volatility.
2. Historical returns are divided by contemporaneous estimated volatility and then multiplied by latest estimate of volatility.
3. For this purpose, volatility is calculated as Exponentially Weighted Moving Average (EWMA) with λ = 0.9.

Factor Model

1. Highest 3-day, close to close, movement of NIFTY, upwards and downwards, is to be considered based on historical data since 2000.
2. The said highest upwards and downwards movement of NIFTY are multiplied by the beta (β) of the stock from a stress period to arrive at a figure representing price movement for each underlying.
3. For revaluing options, the volatility would be shocked by 100% for each underlying.