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Risk Management Framework for Electronic Gold Receipts (EGR) segment

Risk Management Framework for Electronic Gold Receipts (EGR) segment

The capital market regulator of India i.e. the Securities and Exchange Board of India (SEBI) has come out with an elaborate risk management framework for Electronic Gold Receipts (EGR). The market watchdog has released a circular relating to Electronic Gold Receipts that covers various aspects, including margin collection, short-collection or non-collection of client margins, risk reduction mode and settlement, provision of early pay-in of funds for EGR.

The circular will come into effect with immediate effect.

What are Electronic Gold Receipts (EGRs)? 

Electronic Gold Receipts[1] are basically electronic receipts that are issued on the basis of a deposit of underlying physical gold assets. These receipts are deposited with a gold manager for example a depository participant and then these receipts can be traded. These EGRs will then be traded on the Gold Exchanges in India. this would allow investor to trade in EGRs on both gold exchanges and stock exchanges.

SEBI is responsible for regulating the entire ecosystem of the Gold exchange including the other activities such as vaulting, assaying gold quality and fixing delivery standards.

Applicability of the framework for Electronic Gold Receipts: 

The risk management framework for Electronic Gold Receipts is applicable to all the Managing Directors and Chief Executive Officers of all the Stock Exchanges and Clearing Corporations.

Highlights of the Framework for Electronic Gold Receipts (EGR)

The Indian Government had previously notified “electronic gold receipts” as ‘securities’ under section 2(h)(iia) of the Securities Contract (Regulation) Act, 1956 via Gazette notification SEBI (Vault Managers) Regulations, 2021. SEBI also notified rules for the vault managers that paved the way for operationalization of Gold Exchange in India. 

Several other frameworks were issued by the SEBI pursuant to these notifications for the operationalisation of the gold exchange where the gold as a metal will be traded in the form of Electronic Gold Receipts.

The whole transaction in this case can be divided into three stages right from creation of EGRs, trading of EGRs and finally conversion of the EGR into physical gold.

According to the latest circular released by SEBI, the core of the risk management system is the liquid assets deposited by the trading members with Clearing Corporation.       

Following are the requirements that these liquid assets will cover.

  • Mark to Market (MTM) losses (MTM losses on outstanding settlement obligations of the member);
  • Value at Risk (VaR) margins (VaR to cover potential losses for 99.9 per cent of the days); and
  • Extreme loss margins (margins that supposed to cover the expected loss in situations that lie outside the coverage of the VaR margins)  

SEBI stated that the liquid assets of the members at all times will be enough to cover all these requirements.

SEBI also stated that the Clearing Corporations can levy a penalty on Clearing Members (CMs) or Trading Members (TMs) for non-collection or short collection of margins. Within a period of 5 working days of the last working day of the trading month, the penalty will be collected by the Clearing Corporations and the amount shall be credited to its Settlement Guarantee Fund (SGF).

All the clearing corporations and stock exchanges in consultation with one another have been asked to design a standard framework for the imposition of fine on the TM/CM for false or incorrect reporting of margin collected from the clients.

SEBI said that the fine to be imposed on the member should be based on the materiality of the non-compliance done by the members keeping in mind the principle of ‘proportionality’. The other factors that need to be kept in mind while imposing the fines include number of instances and repeated violations.

SEBI further stated that the amount of fine to be charged upon the member can extend up to 100 percent of such incorrect or false amount of margin and also/ or suspension of trading for a certain number of days.

Instructions have been given from SEBI to put the clearing corporations are put on a risk reduction mode wherein the clearing corporations need to ensure that the clearing members and stock brokers are under a risk reduction mode. The threshold for the risk reduction mode has been kept at when 90 per cent of the member’s collateral that is available for adjustments against margins gets utilised on account of trades which fall under a margin system including the crystallised losses.

A disclaimer has been given by the regulator to cancel all the unexecuted orders once the clearing member or stock broker has breached 90 percent of the collateral utilisation level.

The settlement period of EGRs shall be T+1 (trading plus one) rolling basis, said the regulator.

The clearing corporations have been directed by the regulator to maintain a specific Settlement Guarantee Fund (SGF) for the Electronic Guarantee Receipts segment. The corpus of SGF shall not be less than the amount of Rupees 10 crores. 


The purpose of bringing this circular is one step ahead in the operationalisation of the gold exchange with the government’s broader objective to project India’s outsized influence in the physical gold market in the financial market as well. The vision is to realise the unutilised potential of gold which has been lying idle at homes and bank lockers.  

Read Our Article: SEBI’s Proposed Framework for Gold Exchange

Prabhat Nigam

Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.

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